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FOUNDATIONS OF REAL-WORLD
ECONOMICS
The 2008 financial crisis, the rise of Trumpism and the other populist movements which
have followed in their wake have grown out of the frustrations of those hurt by the economic
policies advocated by conventional economists for generations. Despite this, textbooks con-
tinue to praise conventional policies such as deregulation and hyperglobalization.
This textbook demonstrates how misleading it can be to apply oversimplified models of
perfect competition to the real world. The math works well on college blackboards but not
so well on the Main Streets of America. This volume explores the realities of oligopolies, the
real impact of the minimum wage, the double-edged sword of free trade, and other ways in
which powerful institutions cause distortions in the mainstream models. Bringing together
the work of key scholars, such as Kahneman, Minsky, and Schumpeter, this book demon-
strates how we should take into account the inefficiencies that arise due to asymmetric
information, mental biases, unequal distribution of wealth and power, and the manipulation
of demand. This textbook offers students a valuable introductory text with insights into the
workings of real markets not just imaginary ones formulated by blackboard economists.
A must-have for students studying the principles of economics as well as micro- and
macroeconomics, this textbook redresses the existing imbalance in economic teaching.
Instead of clinging to an ideology that only enriched the 1%, Komlos sketches the outline
of a capitalism with a human face, an economy in which people live contented lives with
dignity instead of focusing on GNP.
John Komlos is Professor Emeritus of Economics and of Economic History at the University
of Munich, Germany. He has also taught at universities such as Harvard, Duke, UNC-Chapel
Hill, University of Vienna, and Vienna School of Economics and Business. In 2003 Komlos
founded the field of Economics & Human Biology with the journal of the same name, and
through his research he has come to realize the limitations of conventional economic theory
and has been an ardent advocate of humanistic economics.
FOUNDATIONS OF
REAL-WORLD
ECONOMICS
What Every Economics Student
Needs to Know
SECOND EDITION
John Komlos
Second edition published 2019
by Routledge
52 Vanderbilt Avenue, New York, NY 10017
and by Routledge
2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN
Routledge is an imprint of the Taylor & Francis Group, an informa business
 2019 Taylor & Francis
The right of John Komlos to be identified as author of this work has been
asserted by him in accordance with sections 77 and 78 of the Copyright,
Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced

or utilised in any form or by any electronic, mechanical, or other means,
now known or hereafter invented, including photocopying and recording,
or in any information storage or retrieval system, without permission in
writing from the publishers.
Trademark notice: Product or corporate names may be trademarks

or registered trademarks, and are used only for identification and
explanation without intent to infringe.
First edition published by M.E. Sharpe 2014

First edition published by Routledge 2015
Library of Congress Cataloging-in-Publication Data

A catalog record has been requested for this book
ISBN: 978-1-138-29652-7 (hbk)

ISBN: 978-1-138-29654-1 (pbk)
ISBN: 978-1-315-09997-2 (ebk)
Typeset in Interstate
by Swales & Willis Ltd, Exeter, Devon, UK
CONTENTS
List of Figures ix
List of Tables xii
List of Illustrations xiii
1 Welcome to Real-World Economics 1

My Credo 3
Humanistic Economics 5
A Primer on Blackboard Economics 6
Toward a Paradigm Shift in Economics 8
Real-World Economics Is Preferable 10
Simple Is for Simple Minded 11
“It’s Only a Model!” 13
2 Markets Are Neither Omniscient Nor Omnipotent 19

Markets Are Not Created by Divine Power 19
The Downside of Free Markets 19
Government Is an Essential Component of the Economy 26
Markets Have Limitations 28
The “Achilles Heel” of Markets 31
Morality Should Take Precedence over Markets 31
Economics Is a Social Science and Not a Natural Science 32
Ideology Is Unavoidable 33
3 The Nature of Demand 39

What Is Scarce? 39
Consumer Sovereignty and Endogenous Tastes 40
Wants and Basic Needs 45
The Metaphor of the Invisible Hand 49
The Magic of Competition 50
Consumerism 51
vi Contents
4 Homo Oeconomicus Is Extinct: The Foundations of Behavioral Economics 57

Utility Maximization 57
Optimization Is Impossible for Finite Minds 58
Our Brain Is Imperfect 59
Neuroeconomics 60
Bounded Rationality 61
Satisficing Instead of Optimizing 62
Biases and Wonders of Intuition 64
Heuristics 65
Framing, Accessibility, and Anchoring 66
Prospect Theory 68
Behavioral Economics 74
Cognitive Endowment 76
Genetic Endowment 77
5 Taste Makers and Consumption 81

The Influence of Corporate Power 81
Interdependent Utility Functions 83
Society 85
Culture 86
Fairness 88
Efficiency vs. Equity 88
Self-Interest and Altruism 90
Positive and Normative Economics 91
Expected vs. Realized Utility 92
Imperfect Information 93
Signaling 94
6 Firms and Imperfect Competition 99

Firms 99
The Illusion of Perfect Competition 101
Imperfect Competition: Oligopolies and Monopolies 101
Prices 104
Equilibrium and Disequilibrium 106
Adverse Selection 107
7 Returns to the Factors of Production 109

Marginal Theory 109
Wages 110
The Returns on Capital 119
Profits 120
Institutions as Capital 121
Intangible Forms of Capital 121
Natural Resources 122
Contents vii
Income Distribution 122

The Second Gilded Age 125
Growth in Welfare 132
Ethics and the Skewed Distribution of Income 133
8 The Case for Oversight, Regulation, and Control of Markets 142

Principal-Agent Problem 142
Moral Hazard 144
Transaction Costs 144
Opportunistic Behavior 145
Regulation in the Public Interest 147
Regulatory Capture 148
Moral Constraints 149
Market Failures 150
Exploitation 151
Time and Space 152
Path Dependence 152
Limits and Standards 155
9 Microeconomic Applications on and off the Blackboard 159

Minimum Wage Is Good Economics 159
Price Controls Can Be Good 161
Unions and Countervailing Power 162
The American Medical Association Is a Cartel 166
Discrimination Is Pernicious 167
Redistribution Would Help 168
10 What Is Macroeconomics? 172

Keynes the Savior 172
Keynesian Fiscal Policy 175
Monetary Policy 176
The Liquidity Trap 177
Neoclassical Synthesis 178
The Monetarist Counterrevolution 180
A Macroeconomic Policy Void 181
GNP Is an Estimate of Production and Not of Welfare 183
Production Possibilities Frontier 184
11 Macroeconomics Part II 189

Unemployment and Underemployment 189
The Natural Rate of Unemployment 193
Economic Growth 194
Economic Growth Does Not Increase Life Satisfaction 194
Technological Change Is a Two-Edged Sword 196
viii Contents
Missing Markets 198

Environment 200
12 Macroeconomics Part III 205

The Government Is Part of the Solution 205
The Challenges of Keynesian Fiscal Policy 205
Crowding Out 206
The Threat of a Mushrooming National Debt 207
Taxes Are Good for Us 208
Savings or the Lack Thereof 213
Inflation and Deflation 214
Nominal vs. Real Wages 215
The Obama Stimulus 215
13 International Trade: Open Economy Macroeconomics 219

The Theory of Comparative Advantage 219
The Effects of Tariffs on Welfare Are Complicated by Underemployment 220
Free Trade Is Not an Engine of Growth 223
The Protection of Infant Industries 224
Unbalanced Trade Creates Underemployment 224
Import Certificates Are the Only Safe Way to Eliminate the Trade Deficit 226
New Trade Theory 227
14 The Financial Crisis of 2008 231

Preliminaries 232
Financial Innovations 234
Double Trouble: Greenspan’s Bubbles 236
Early Warnings Fell on Deaf Ears 238
The Minsky Moment: The Meltdown of 2008 241
Thirty-One Factors That Contributed to the Crisis 243
The Bailout: A Crisis Obama Wasted 253
Nationalization of the Banks as Pre-privatization 256
15 Conclusion: The Foundations of Real-World Economics 265

Imaginary vs. Real Markets 265
The Inconvenient Truth about the Current State of the U.S. Economy 266
The U.S. Economy Is Facing 14 Headwinds, None of Which Is Fixable
in the Foreseeable Future 269
Index 273
FIGURES
2.1 Poverty Rate among Children below Age 18 21

2.2 Cumulative Distribution of After Tax Income, U.S., 2014 24
2.3 Ratio of the Top 90% of the Disposable Income Distribution
to the Bottom 10%, 2014 25
2.4 Health Care Expenditures, 2016 29
2.5 Life Expectancy at Birth 30
3.1 Conventional View of Consumer Sovereignty 40
3.2 In Reality Tastes Are Determined within the Economic System 41
4.1 Medicare Part D Options Confuse 63
4.2 What Is the Average Length of These Lines? 67
4.3a and b Context Matters a Lot in Case of Ambiguity 67
4.4 Concave Utility Function Implies Risk Aversion 69
4.5 Convex Utility Function Implies Risk Seeking 69
4.6 Changes in Utility and Wealth of Two Investors According to
the Conventional Model 70
4.7 The Value Function Defined on Gains and Losses in Prospect
Theory of Behavioral Economics 71
4.8 Comparison of Cathy’s and Susan’s Utility According to
Prospect Theory 72
4.9 Conventional Comparison of Two Options 73
4.10 Experimental Results Conform to Prospect Theory: The Case
of Two Options 74
4.11 Conventional Demand and Supply Analysis with Negative Feedback 75
4.12 Positive Feedback Loop Causes Asset Price Bubbles 76
6.1 Profit of a Monopolist (Without Fixed Costs) 104
7.1 Index of the Productivity-Wage Gap in the U.S. 111
7.2 Median Income by Gender in 2016 Dollars, 1955–2016 114
7.3 Share of Labor Income in GDP (%) 115
7.4 Distribution of Household Income by Ethnicity, U.S., 2009 123
7.5a and b Distribution of Household Income by Quintiles, U.S., 2016 126
7.6 Distribution of Earnings in 2016 Compared to Ford Workers
of 1914 127
x Figures
7.7 Trends in the Share of Total Income by Households, 1967–2016 127

7.8 Changes in the Share of Total Income in Three Epochs, by Quintiles 128
7.9 Growth of Income by Quintiles and Percentiles, 1979–2011 130
7.10 Ratio of Group’s Income to That of the Poor 131
7.11 Growth of Welfare by Quintiles, 1979–2011 133
7.12 Inequality Is Inversely Related to Happiness 137
8.1 The Optimum Level of Freedom in an Economy 147
8.2 Corporations Invest Heavily in Order to Tilt the Playing Field in
Their Direction 149
8.3 Investment Decision with Perfect Foresight Two Periods Ahead
Is Easy 153
8.4 Investment Decision with Perfect Foresight One Period Ahead
Is Also Easy 154
8.5 With Sequential Decision, Optimum Technology “A” Is No
Longer Feasible 154
9.1 Profit of a Quasi-Monopolist Without Fixed Costs 160
9.2 The Effect of a Price Ceiling on a Monopolist Without Fixed Costs 162
9.3 Profit of an Oligopolist Employing Seven Workers 163
9.4 Median Household Income by Education, 2016 Dollars 164
9.5 Physicians per 1,000 Population, 2016 166
9.6 The Supply and Demand for Doctors with Supply Constraint
Brought About by the American Medical Association 167
9.7 Redistribution Increases Total Utility and Social Welfare 169
10.1 U.S. Consumer Confidence Index, 1996=100 173
10.2 Fluctuating Demand During the Great Depression 174
10.3 Automobile Production in the U.S., 1900–1970 174
10.4 Velocity of Circulation of M1 177
10.5 The Interest Rate Charged by the Federal Reserve 178
10.6 Quantitative Easing and GNP Per Capita 179
10.7 Capacity Utilization All Industries 185
10.8 Production Possibilities Frontier with Institutional Constraint 186
11.1 The Official Unemployment Rate and the Official
Underemployment Rate 190
11.2 Official Underemployment Rate (U6) by Ethnicity 191
11.3 The “Natural” Rate of Unemployment Compared to the
Official Unemployment Rate 193
11.4 Global Warming 199
12.1 U.S. National Debt as a Percentage of Gross Domestic Product 206
12.2 U.S. Personal Saving as a Percentage of Disposable Income 213
13.1 The Effect of Tariffs on Domestic Production and Consumption 221
13.2 Men’s Hourly Wages by Education 223
13.3 U.S. Trade Balance in Goods and Services 225
13.4 U.S. Cumulative Balance of Payments Deficit Is $15 Trillion in
2017 Prices 226
Figures xi
14.1 Price to Earnings Ratio of S&P 500 Stocks 233

14.2 Ratio of U.S. House Prices to Rents and to Nominal Income,
Index 1995=100 237
14.3 National Home Price Index, January 2000=100 239
14.4 Fed’s Interest Rates and GDP Growth 245
14.5 Real Median Household Income in the U.S. 255
14.6 Median Household Income by Ethnicity, 2016 Dollars 256
15.1 Average Annual Growth Rates of Real GDP Per Capita 266
15.2 Real GDP and Potential GDP, 2009 Prices 267
15.3 Women’s Hourly Wages by Education 268
TABLES
1.1 Electoral Votes Needed to Tip the 2016 Presidential Election in

Favor of Hillary Clinton 13
2.1 The U.S. Homicide Rate Per Capita as a Multiple of Those in
These Countries 20
2.2 Drug-Related Deaths Per Million Persons Aged 15–64 21
2.3 Share of Income and Wealth Distribution in the U.S., 2013 26
7.1 Growth in Productivity and Real Wages, U.S., 1947–2011 111
7.2 The Tax Returns of the Superrich 124
7.3 Racial Gaps in Median Household Incomes in 2014, Dollars 125
7.4 Share of U.S. Aggregate Income by Quintiles, 1967–2016 129
7.5 Real Disposable Income, 1979–2011, Thousands of 2011 Dollars 130
7.6 International Comparison of CEO Compensation, 2015 135
7.7 International Comparison of Inequality, 2014 136
9.1 Change in Household Income Since the Year 2000 in 2016 Dollars 164
10.1 Increase in Disposable Income of U.S. Households by Quintiles, 1979–2011 184
11.1 The Official and Real Unemployment Rate in the U.S., January 2018 190
11.2 Ranking of Happiness, 2012–2014 195
12.1 Happiness Rank and Average Tax Rates 208
12.2 There Is No Relationship Between Economic Growth and the
Top Tax Rates 210
13.1 U.S. Average Annual Current Account Balance (Billions of 2017 Dollars) 224
ILLUSTRATIONS
2.1 The Market Treats Some Children Cruelly 23

2.2 The Market Did Not Give Rosa Parks the Option to Ride the Bus 32
3.1 Virginia Slims’ Successful Marketing 42
3.2 Consumerism Overwhelms 43
3.3 Drink to Contentment 47
3.4 The Marlboro Man 48
5.1 What Is One Without a Mansion and a Yacht? 95
7.1 United, Labor Would Have Countervailing Power and Obtain a Bigger
Share of the Pie 113
7.2 Life Would Just Not Be the Same If I Had to Travel on a
Commercial Airline 124
8.1 Doctors for Camel Exploit the Gullibility of Consumers 151
11.1 You Did Not Bleed on Omaha Beach on June 6, 1944 199
14.1 Brooksley Born 238
14.2 No Less Than Eight Million Families Lost Their Homes as a
Consequence of the Financial Crisis 254
1 Welcome to Real-World
Economics
We must grant to markets what belongs to markets—and retain for people what rightfully belongs
to them.
The author
The financial crisis of 2008 illustrated vividly how markets often do go haywire, yet
textbooks remain unchanged, failing to convey the fundamental flaws and systematic weak-
nesses of the free-market system. The recent election of Donald Trump was fueled by the
frustrations that have been accumulating due to an economic system that skews its benefits
to a select few and leaves too many people behind scrambling to eke out a bare existence.
Yet, academics and politicians continue to sing the praises of abstract markets as if they had
descended straight from heaven while maintaining a conspiracy of silence about the fact
that without government help countless giant corporations would have landed in the dustbin
of history.1 When the chips were down, only the Fed could print the trillions of dollars to prop
up markets and save them from extinction.
The doctrinaire approach to the teaching of economics is well illustrated by the oft
repeated but rather arrogant assertion, “We know that markets work.” Instead, teachers
of economics should admit at the outset that while markets do work well in some circum-
stances they only do so within an appropriate institutional framework, and they not only
work inefficiently in others but often tip the stream of benefits toward a few insiders. Hence,
our job is also to explore and delineate clearly the circumstances that prevent real markets
from working as well as their theoretical counterparts and suggest remedies for their fail-
ings. The ideological commitment to “market fundamentalism,” which led to the excessive
reliance on markets in the making of public policy, has brought us to our current, precarious
situation. I hope the present volume can help rectify this misconception and improve the
teaching of economics by presenting a real-world perspective as opposed to the fantasy
world of mainstream textbooks.
Alan Greenspan’s post-meltdown confession that he made a ghastly error in believing in—
and aggressively preaching—market deregulation demonstrates vividly the miscalculations
of the fundamentalist approach to economics. When asked by Congressman Henry Waxman,
“You have been a staunch advocate of letting markets regulate themselves . . . Were you
wrong?” Greenspan responded:
2 Welcome to Real-World Economics
I made a mistake in presuming that the self-interest of organizations, specifically

banks . . . were such that they were best capable of protecting their own sharehold-
ers and equity in the firms . . . The problem here is [that] something which looked
to be a very solid edifice and indeed a critical pillar to market competition and free
markets did break down and . . . that . . . shocked me. I still do not fully understand
why it happened.
History is, of course, replete with people wearing similar ideological blinders. Greenspan
makes a number of serious mistakes in that short statement: banks are incapable of assess-
ing the impact of their policies on the rest of the financial system. That is the role of the
oversight authority. This is known as systemic effects. They just see their own balance sheets
and not those of their rivals. The Fed is supposed to have the overview. Other problems with
his statement were noted by the Nobel Prize winning founder of behavioural economics,
Daniel Kahneman. Referring to the above statement as “Greenspan’s confession,” he was
surprised by:
[Greenspan’s] assumption that agents are fully rational, and there is a lot of evidence
clearly that they’re not. The other is the idea that firms are actors; that firms are
rational agents. But firms are really not actors . . . there are executives making deci-
sions; the interest of those executives and the interest of that abstract idea that we call
the firm are clearly not aligned and if we want to understand why firms are suicidal it is
in part because the agents are . . . quite frequently not committing suicide. So, there is
a mismatch between firms and the actors who act in their behalf.2
Waxman continued his query of Greenspan by asking, “You had an ideology . . . and this
is your statement: ‘I do have an ideology, my judgment is that free competitive markets
are by far the unrivaled way to organize economies.’” Greenspan answered by offering
the congressman a philosophical lesson: “Remember . . . what an ideology is . . . [it] is a
conceptual framework with the way people deal with reality. Everyone has one . . . Yes,
I found a flaw . . . in the model that I perceived . . . how the world works.” Waxman: “In other
words, you found that your view of the world, your ideology was not right.” Greenspan:
“Precisely. That’s precisely the reason I was shocked.”3 Greenspan was right in this case:
ideology is unavoidable in economics because one approaches it with some values and an
organizing system of thought, that is, some preconceived notions of how the world works.4
This is unavoidable.
Greenspan should not have been so shocked. There were plenty of warnings: Brooksley
Born, Edward Gramlich, Paul Krugman, Raghuram Rajan, Nouriel Roubini, Peter Schiff,
Robert Shiller, Joseph Stiglitz, Nassim Taleb, and John Taylor, to name but a few eminent
proponents of opposing views. They were no strangers to Greenspan or to the establish-
ment. They were not outsiders. They are mostly scholars who have held professorships at
major universities or have distinguished themselves in other ways. All he would have had
to do was to listen with care to their well-reasoned warnings with an open mind. Instead,
Greenspan dismissed their ideas out of hand and cold-bloodedly thwarted Brooksley Born’s
valiant efforts to regulate derivatives a decade before the meltdown.5
Welcome to Real-World Economics 3
One did not need a PhD to recognize that housing prices were off the charts. Yet,
Greenspan and Benjamin Bernanke, his successor in 2006, ignored all the evidence because
they were blinded by their ideology of the infallibility of markets. They were prisoners of
their own ideology. If one does not subject that ideology to empirical evidence, the ideology
becomes dogma.
The notion that ideology plays a major role in the social sciences has a long history.
Observers of human societies cannot be free of their preconceived notions “because the
understanding of a ‘social’ experience itself is always fashioned by ideas that are in the
researchers themselves.”6 One of the many limitations of mainstream economists is their
reluctance to address the problem of ideology adequately and to acknowledge the need to
understand its role in economic policy. Textbooks simply ignore the issue. Yet, as Greenspan
suggested, we cannot help but begin to organize our thoughts without making some funda-
mental assumptions, and these assumptions are a function of our own mindset, worldview,
and intellectual and emotional commitments and therefore influence greatly the rest of the
ideas developed in the discipline.
Hence, economics cannot be purged of ideology; our political, moral, and philosophical
likes and dislikes—conscious and unconscious—are reflected in our assumptions and thus in
how we structure our economic thinking and our understanding of the world around us. Much
of that ideology is colored by our political philosophy. In other words, contrary to received
wisdom, economics—despite the extensive use of mathematics—will not be a rigorous disci-
pline until it is based essentially on verifiable empirical evidence. Our long-range goal should
be to provide such an empirical foundation to the discipline. Our more immediate goal here
is to present evidence to support the notion that the mainstream view is misleading. Our aim
is to introduce the student to alternative perspectives, thereby providing a complement to
standard presentations of the subject and widening the student’s understanding.
My Credo
Perhaps I should first clarify my own credo—the assumptions that underlie my own worldview
of economic matters. I consider my views to be progressive, democratic, and humanitarian.7
These values imply that I believe that we could restructure the economy so as to improve
our lives by focusing on increasing our life satisfaction instead of on income growth. I am
also convinced that we should begin our economic analysis with empirical evidence rather
than on ivory-tower theorizing. Experiential evidence should be at the core of the discipline
rather than assumptions. In the words of Deirdre McCloskey, a U.S. economics professor,
“economics is supposed to be an inquiry into the world, not pure thinking.”8
In other words, I believe that economics should reduce its reliance on deductive logic and
mathematics and become more of an inductive discipline.9 Human beings are not inanimate
objects whose trajectory can be described accurately by a mathematical function of a hand-
ful of variables. Unlike planets, they can and do change direction. Economics should not
attempt to be an axiomatic discipline like geometry. Sir Isaac Newton said as much: “I can
calculate the movement of the stars, but not the madness of men.”10
To understand the world around us we need an economic theory based on empirical evi-
dence, one that can hold its own when transferred from the blackboard11 to, say, the slums,
areas with a concentration of poverty in our big cities. The pieces of the economic puzzle do
not fit together as smoothly in Bronx’s 10454 zip code area with a median household income
of $20,210 as they do in Loudoun County, Virginia’s 20129 zip code district, with a median
household income of $250,000—four times the national average.12 Moreover, we need a
theory of economics that is not isolated from other social sciences but integrates insights
derived from sociology, psychology, political science, and philosophy. Economists who focus
on mathematics at the expense of these disciplines tend to neglect those issues that are not
easily tractable mathematically and end up with a mechanistic view of the world.
In addition, my economic principles are humanistic in that they focus on values that
enhance the human experience and lead to mass flourishing. Pain also plays a major role
in my thinking. I advocate its minimization. In contrast, the mainstream does not give
pain much thought. But the current economic system treats some groups with an indif-
ference that borders on cruelty. The groups include those children who are attending
dysfunctional schools in dysfunctional neighborhoods, people who are unable to catch
their bearings in the new economy created by the IT revolution and globalization, the
working poor, or those who are trapped in a culture of poverty. They ought not be treated
like machines without feelings.
The quest for the good life is as old as philosophy itself. Aristotle was among the first to
think about it systematically around 350 bc by arguing that the good life was about under-
standing the world around us.13 Much of this book is about just that: understanding the nature
of today’s economy as it exists in reality rather than on academic blackboards. Change must
start with understanding. My focus is on real human beings and how they actually live and
feel, rather than inanimate objects such as money or abstract concepts such as output or
gross national product, which economists often substitute for the human dimension. I do
not believe that the level of money income translates automatically into life satisfaction.
This is particularly the case for statistical averages, because these hide what is going on in
the lower tail of the income distribution. This distribution is increasingly important insofar
as it has become much more skewed and consequently its potent political force has been
manipulated by the rise of Trumpism.
Many economists are heard saying that “the economy is in good shape.”14 OK, but what
about the people in it? Are most people doing well or are there segments of the popula-
tion which are excluded from the good life? Hence, it seems to me that average growth of
consumption, money income, or gross domestic product (GDP) should not be the exclusive
focus of economics. As constituted, the current U.S. economic system has so many chal-
lenges and fault lines that it is incapable of providing a satisfactory life to about 44% of the
population.15 That implies that 56% were doing just fine, but is that good enough for a $20
trillion economy that is supposedly the richest in the world?
Furthermore, I believe that our starting point should not be Adam Smith’s Wealth of
Nations, but his Theory of Moral Sentiments (1759), in which he asserted quite forcefully
that we possess an innate empathy toward our fellow human beings.16 Morality and ethical
principles of fairness are part of our nature. We ought not expunge these notions from the
economics canon. Hence, I begin with the notion that economics ought to aspire to creat-
ing a just society and one in which compassion is as important as efficiency, if not more
so. Admittedly, the meaning of justice is arguable, but that does not give us the license to
disregard it completely. I think that an important aspect of it should be that the economy
should minimize suffering, while enhancing human dignity and self-worth. I seek a common-
sense Aristotelian “golden mean” which is situated between two extremes of advocating
excessive changes at the one end and complacency at the other.
Humanistic Economics
Humanistic economics need not be an oxymoron. It implies the vision that a kinder and more
just economic system is possible, one that is embedded in a truly democratic society that
not only empowers people but enables them to live their daily lives with less uncertainty,
less manipulation, less taking advantage of people’s weaknesses, and less fear that their
lives could collapse like a house of cards. This capitalism with a human face envisions an
economy with zero unemployment, zero inflation, zero trade deficits, and zero government
deficit over the business cycle.
Humanistic approach to economics highlights that a meaningful life goes well beyond
consumption and production. Since human beings are not simply “economic agents”—the
values promulgated by the mainstream—the emphasis on money often conflicts with human
values. Instead of advocating growth at any price, “Capitalism with a Human Face” would
enable more people to live fulfilled, less harried, and ultimately more satisfied lives. John
Maynard Keynes said as much:
I think that capitalism, wisely managed, can probably be made more efficient for attaining
economic ends than any alternative system yet in sight, but that in itself it is in many ways
extremely objectionable. Our problem is to work out a social organization which shall be
as efficient as possible without offending our notions of a satisfactory way of life.17
So, in contrast to the mainstream, in my view, the purpose of any economic system ought
not be “growth” for its own sake, but the efficient allocation of resources. Foremost, it
should be the provision of a decent life in which output is distributed equitably, people do
not need to struggle to meet their basic needs, can avoid the rat race of fierce competition
just to be able to stand still, and can realize their human potential. This means having suf-
ficient leisure time to participate in the community’s social, cultural, and political life.
People mistakenly equate economic growth with rising living standards. They harmonize
with the politicians’ and economists’ pro-growth chorus. However, surveys contradict this
perspective. In spite of all the growth in our lifetime, satisfaction eludes us in a big way.
The growth-at-any-price perspective does not consider the decisive problem of distribution:
economic growth will not help the destitute, the uneducated underclass, or the majority
of those who are underemployed. In spite of all the growth since the Industrial Revolution
a quarter millennium ago, there is much discontent with the economy as well as with the
political system. Consider that in July 2017 in the country with aspirations to be the great-
est in the world, 40% of the population evaluated their life as “struggling” and another
3% consider themselves “suffering.”18 That adds up to no less than 140 million people with
dependents adding an extra 40 million. It seems like we ought to be able to generate more
satisfaction with $20 trillion. The economy seems to be quite inefficient in producing well-
being. The problem is that most of the discontented have yet to understand how the “free
marketeers”—radicals who advocate free markets at any price—have led us astray.
De jure equal opportunity is insufficient for a just economy without de facto equal
opportunity. Wealth is a privilege because it provides opportunities. Babies born into poor
families have less chance of living a fulfilled life than those born into wealthy ones. Their
future development will be on divergent paths determined by their initial endowments.
Such random allocation at the start of life cannot possibly be the basis of a good society.
Our goal ought to be to create an environment in which children have more equal opportu-
nities, and those who are born at a disadvantage can be compensated by society for their
initial bad luck.19
My aim in writing this book is to provide a critical framework that helps students under-
stand the real economy—the actually existing one—and how the mistakes of conventional
theorizing have landed us in our current predicament with rampant divisiveness and dis-
satisfaction. The book should also serve as a guidepost of the kind of economy to which we
should aspire, and serve as a counterweight to conventional textbooks which claim to be
above morality but conveniently disregard the untenable level of inequality the economy
helped to create.
As we have seen hundreds of times since the Industrial Revolution, and most vividly in
2008, free markets, being a human invention, often become dysfunctional; they do not
deserve our blind faith. Furthermore, there are better ways to measure progress than in
terms of money. One need not be a naive utopian to be appalled by a society in which
one bumps—sometimes literally—into scenes of gross inequity around the corner. And there
must be something wrong with an economics that fosters a system which leaves so many
people stranded that they strike back at the establishment by voting for a leader such as
Donald Trump. In this spirit, this book is dedicated to a new kind of economics that promotes
Capitalism with a Human Face.
A Primer on Blackboard Economics

“What do George Akerlof, Kenneth Arrow, Daniel Kahneman, Paul Krugman, Thomas
Schelling, Herbert Simon, Robert Shiller, Joseph Stiglitz, Richard Thaler, and Oliver
Williamson have in common?” would make a great Econ 101 question except for the fact that
the contributions of these Nobel Prize winning economists to the Dismal Science are usually
excluded from mainstream Econ 101 textbooks or relegated to obscure footnotes. Instead of
including their critical ideas, introductory textbooks hype a free-market utopia which does
not extend much beyond the edges of the blackboard. Hence, most textbooks do not help
to understand the essentials of the real existing market economies in the hyper-globalized
world of the twenty-first century. Rather, they present a caricature of the economy at a level
of abstraction that creates a fantasy world and distorts the student’s vision: how inefficient!
They perpetuate a stereotype that markets are efficient, thereby somehow automatically
leading to a blissful life, and they continue to sing the praises of the immense achievements
of the free-market system, keeping any demurrals muted.
Super rationality reigns in this utopian kingdom inhabited by consumers with sufficient
brain power to know every detail of the economy and are therefore not satisfied with any-
thing less than doing the very best they can. They possess perfect understanding of all
the nuances in small print, perfect foresight from the beginning to the end of their lives,
and are not inhibited by the challenges of information overload insofar as information is
free, available instantaneously, and a cinch to understand. They are neither manipulated
nor tempted, so they have perfect control over their desires. They are not subject to bouts
of irrational exuberance. Actually, this is a misguided view of human nature. Emotion and
the unconscious mind play a big role in our decisions. In Freud’s view, the unconscious is not
only the ultimate source of many of our desires, but they frequently come into conflict with
our rational thoughts.20 Overlooking this leads economic policy makers astray. After all, if
people are rational, there is no need to worry about banks giving predatory risky mortgages.
Everyone knows what they’re doing.
Moreover, in the mainstream’s fantasy world there are no brands, and goods have
no quality dimension, so product choice is a no-brainer: two boxes of generic cereal, or
three? There is no small print in contracts, no traps, no false promises, so buyers need
not be on their guard. There are no regrets in this idyllic economy, no need for human
judgment or intuition, no emotion, no real uncertainty hence no mistakes, and no need
to worry about lawyers’ fees or other enforcement or transaction costs. Indeed, there is
no society at all, no children, no gender, no glass ceilings, no class hence no underclass,
no power hence no power imbalances, and neither space nor race, and hardly any time
dimension. In this fictional world consumers are not influenced by advertisements or by
other people’s consumption.
Producers also inhabit this imaginary economy; they also know everything there is to
know about consumers’ wants as well as their own firms, so they can maximize their profits
with perfect ease. Actually, there are no firms at all in this economy, in the sense of a mod-
ern corporation, just simple entities like a Ma-And-Pa operation. There are no shareholders
or boards of directors, no CEO who might maximize her own income rather than that of the
far-away shareholders. This pseudo-firm does not need to advertise to persuade consumers
to buy its products, much less collude with others, deceive, or game the system.21 Lobbyists
are an extinct species, so there is no political process that can tilt the playing field in favor of
the wealthy and influential.22 Problems are posed in terms of a single decision without ante-
cedents and without uncertainty and without further implications in subsequent periods. In
fact, time hardly plays a role in this static world: the past is passé and the future is obvious.
So, there is only the right now, and no sequential decisions need to be pondered.
Laws are in place so we do not need to discuss how they came to be or what advantages
they provide to the powerful and the extent to which they disregard the dispossessed. If
laws go unmentioned it is because they go unbroken, that is, people do not take advantage
of each other’s lack of information or inaptitude and hence there are no enforcement costs.
So, oversight would be a waste of effort and of brainpower. Everything runs smoothly—there
are no chances to finagle, no conflicts, let alone wars. Basic needs have given way to benign
wants. Free markets are efficient, hence above morality, so questioning their laissez-faire
premise would be a waste of ethical scruples. (However, this is also a value judgment imply-
ing that efficiency is valuable rather than, say, sufficiency, or sustainability, or fairness, or
minimizing risk, poverty, or pain.) Hence, it is alleged that laissez-faire does not need a moral
basis, and ethics and aesthetics are superfluous. However, this overlooks the inconvenient
fact that this in itself is also a value judgment. Well-being is measured by income in mon-
etary terms, but there are no rich or poor so there is neither power nor hunger, therefore
the system is democratic: one dollar, one vote. The fact that some hold more dollars than
others is their birthright, so there is no need to waste time discussing that de facto, they do
have more votes. These are the basic elements of what is called positive economics, at least
on the blackboard—that is to say, the way economics is taught at the undergraduate and
especially at the introductory level.
Furthermore, the conventional wisdom invariably emphasizes the perfectly competi-
tive model, although a negligible segment of the economy can still be conceptualized as
such in an economy full of too-big-to-fail banks and supranational corporations with global
vision who operate above political oversight. The psychological world of the ultra-rational
consumer is essentially pre-Freudian and pre-Pavlovian, that is to say, it lacks a sound psy-
chological basis. It is rooted in the much simpler Smithian world of the eighteenth century
without the moral fiber of that world. That is like trying to understand molecular motion
using Newton’s laws instead of those of quantum mechanics; hence, the current state
of the economics discipline is essentially inadequate for the post-meltdown world of the
twenty-first century.
However, an increasing number of economists believe that the above “ivory tower”
economy, rooted in simplistic assumptions, is merely a product of our imagination.23 It is
inhabited by implausible super-rational individuals, a race of Übermenschen, or supermen
and superwomen devoid of emotion, living alone hence without any sense of community,
whose only identity is that of being consumers, or producers with hardly any interaction
with others.24
Toward a Paradigm Shift in Economics

However, economics is far too important to be left to blackboard economics. In order for it
to be useful it must bear some semblance to reality and it must work for the benefit of Every
Man on Main Street not only for the few. Because it impacts our lives to such a great extent,
it is arguably the most important academic discipline; no other has such direct and immedi-
ate impact on our daily lives in terms of employment, income, consumption, and investment
as does economics. That is why the media is full of data, information, and reporting. That is
why the government has institutionalized the role of economics in effective governing. The
White House has the Council of Economic Advisers as well as the National Economic Council;
the legislative branch’s Congressional Budget Office has 235 employees, the Department
of Commerce has the Bureau of Economic Analysis with 500 employees; the Bureau of
Labor Statistics employs 2,500; the Bureau of the Census also collects and analyzes some
economic data and employs 5,600 people. So, lots of effort is expanded on getting the data
right. It behoves us to get the theory right as well and not to delude ourselves with abstrac-
tions. The discipline should be about flesh and blood beings and not economic agents. This
text is dedicated to this point of view.
Mainstream economics steered us straight into the biggest economic crisis in 75 years,
and political crisis was not far behind. Mainstream economics was also unable to create an
inclusive economy in which most people felt good. Hence, it is time for a paradigm shift in
economic theory. Instead of chasing the elusive “American Dream” in a “rat-race” econ-
omy with a few winners and many losers,25 we should focus on creating a more harmonious
economy with a decent, sustainable, dignified, creative, secure, peaceful, satisfactory, and
enjoyable life, one that is not based on excessive consumption and instant gratification—in
short, one that is less materialistic.26 For the first time in history we have the possibility to
achieve a quality of life that eluded our predecessors. However, in order to live comfortably,
we do not need an ever-increasing quantity of goods. Materialism is insatiable and therefore
cannot satisfy, because it always makes us want more. Rather, we need to rein in our appe-
tite, our greed, and have a mindset that is less concerned with success measured by money
and more concerned about the spiritual and social aspects of life.27 Instead of growing the
economy, we need psychological, spiritual, and moral growth. However, for that we also
need to rethink economic principles. That is what this book aims to foster.
The Canadian Institute of Wellbeing defines well-being thus:
The presence of the highest possible quality of life in its full breadth of expression,
focused on but not necessarily exclusive to: good living standards, robust health, a
sustainable environment, vital communities, an educated populace, balanced time use,
high levels of civic participation, and access to and participation in dynamic arts, culture
and recreation.28
In short, well-being is by no means identical with GDP or output or income.29 A satisfactory

life in a capitalism with a human face should include the minimizing of poverty, pain, inequal-
ity, unemployment, stress, anxiety, and insecurity, and an increase in health, leisure time,
social relationships, love, respect, ethics, intellectual satisfaction, and a moral life. President
Jimmy Carter understood this when he said in 1979:
[t]oo many of us now tend to worship self-indulgence and consumption. Human identity
is no longer defined by what one does, but by what one owns. But we have discovered
that owning things and consuming things does not satisfy our longing for meaning . . . It
is the truth and it is a warning.30
However, his warning was not heeded any more than Eisenhower’s warning of the “grave
implications” of the military-industrial complex.31
The reader should not misunderstand. I am not supporting abolishing markets or creating
a leviathan of immense proportions, and I am resolute about protecting freedoms enunci-
ated in the Universal Declaration of Human Rights. However, I have a wider conception of
liberty than Milton Friedman or Ronald Reagan did. My conception is closer to Amartya
Sen’s notion of capability. It includes the freedom from anxiety of an unrestrained form of
capitalism that my pensions will disappear, free from the anxiety associated with our lives
today: threat of crime, or becoming unemployed, or not knowing what happens if I become
sick or unable to pay for my college tuition, as well as the freedom from seeing the suffer-
ing of the underclass, the unemployed, and homeless. This is congruent with the classical
conception of liberty also echoed by Edmund Burke.32 My conception also includes the free-
dom to live without the hard-press sales pitches of intrusive advertisements, or being free
from the feeling of relative deprivation from seeing the lifestyles of the profligate rich and
famous. One should also be free to develop one’s personality from within rather than having
it imposed through the media. Developing one’s character autonomously without the inter-
ference of the profit motive of big business is an essential aspect of true freedom. We would
then not be inculcated with the fundamental elements of consumerism.
Furthermore, I also believe that many markets work well some of the time and a few mar-
kets work well most of the time, but we should verify if particular markets do what we expect
from them. We need to think about improving their functioning so that we ourselves can
function better in them. I am an enthusiastic supporter of those markets that enable peo-
ple to exercise their creativity, autonomy, and individuality without being manipulated and
without interference from trend setters and predatory lenders, but my support is contin-
gent on empirical evidence. I refuse to disregard evidence that is contrary to the orthodox
canon.33 If markets obviously do some of us harm, then we must retain the ultimate right to
make alternative arrangements and take collective action to relieve the discomfort. This is
the humanistic approach to economics: we should minimize suffering, mental and physical.
Crucially, we should remain the masters of markets, and not vice versa. Furthermore, the
benefits of markets should not accrue to a few members of the society, because that would
be unfair and because that brings about relative deprivation. This was also at the root of
the “Occupy Wall Street” movement. This is not a quixotic perspective. This is the approach
of the Nordic countries, which usually are on top of all lists that measure the quality of life.
Actually, there is a continuum of socioeconomic systems, ranging from market funda-
mentalism to socialism. I advocate finding that constellation of institutional arrangements
at the golden mean between the two polar extremes that can provide most of us, as well as
future generations, with a reasonably fulfilled life. I do not believe that we need to “grow
the economy” to achieve this. Rather, we need to create a fairer economy that can sustain
future generations and that produces less discontent and less insecurity than the current
version does.
As E.F. Schumacher put it, “The most striking thing about modern industry is that it
requires so much and accomplishes so little. Modern industry seems to be inefficient to a
degree that surpasses one’s ordinary powers of imagination.”34 By “accomplishing so little,”
he meant that the economy provides so little life satisfaction despite high average incomes.
In other words, we should not set ourselves the goal of producing as much as possible but to
improve our sensibilities so that we can obtain more gratification with less: “the aim should
be to obtain the maximum of well-being with the minimum of consumption.” Schumacher
also insisted that work itself would yield much more satisfaction if the scale of enterprise
were smaller so that workers would retain more of their autonomy. Thus, the politicians’ and
economists’ admonition to “grow the economy” will not get us further.
Real-World Economics Is Preferable

There is an increasing recognition that mainstream economics is in need of a paradigm
change. There are many efforts underway to bring change to the discipline including
“Rethinking Economics,” an international movement committed to “building a better eco-
nomics in society and the classroom.”35 On the recent 500-year anniversary of Martin
Luther’s The 95 Theses, it posted “33 Theses for an Economics Reformation” to the entrance
of the London School of Economics, which starts with the assertion that “within economics,
an unhealthy intellectual monopoly has developed.” The 33 theses include all of the points
36
discussed in this book. The Institute for New Economic Thinking, The International Confe
deration of Associations for Pluralism in Economics, have similar aims.37 The latter is made
up of some 38 separate organizations. In short there are many efforts underway to reform
the discipline.
Thus, although many economists and students have rejected the simple mainstream
models, their views have not been adequately represented in mainstream textbooks. For
instance, W. Brian Arthur, a noted authority in complexity theory, explains:
[c]omplexity economics . . . assumes that the economy is not a perfectly balanced

machine, but an evolving complex system. Actors in the economy do not necessarily
face well-defined problems or use super-human rationality in making their decisions.
They explore, try to make sense, and react and re-react to the outcomes they together
create. Viewed this way, the economy is not in stasis, but always forming, always
evolving . . . Bubbles and crashes happen, markets can be “gamed” or exploited, and
history and institutions matter. The result is a rigorous but realistic picture of the
economy.38
Moreover, under the heading “Aims and Scope,” the editors of the journal Capitalism and
Society are explicit in their criticism of the mainstream:
Today’s established economics—the economics dominant in classrooms, banks, and

governments—misconceives the modern economy. This disconnect has consequences
for how we understand history, how we make policy, and how we view capitalism. Its
explanations fail and mislead at important junctures in modern history. Until eco-
nomics is grounded on the basic character of modern economies—the ignorance, the
uncertainty, and the new ideas for speculation and innovation—it limits and distorts
our view.39
In short, we need to take a fresh look at the realities around us instead of accepting at face
value dubious illusory notions conceived in the ivory tower, no matter how brilliant the theo-
rems and how impressively sophisticated the mathematics seem to be.
No less an authority than Nobel Prize winning economist, Joseph Stiglitz, declared—as it
turns out prematurely—that “neoliberalism as a doctrine; market fundamentalism is dead.”40
Yet, you would not know it by reading the popular textbooks in the field, which influence
a million students every single year. This is not a benign oversight. It has immense conse-
quences insofar as it influences the media, political discourse, and the mindset of the voting
public. No wonder, then, that many ask, “why economics is on the wrong track.”41, 42
Simple Is for Simple Minded

The argument that a simple overview of the discipline suffices in Econ 101, because one
must lay the foundations before students can learn more sophisticated aspects of the dis-
cipline, is utterly misguided.43 It sells the students far too short. The foundations ought
not to be such a caricature that distorts reality beyond recognition. I dare say that if the
straight-talking Nobel Prize winning physicist, Richard Feynman (1918–88), were still with
us, he would concur with me. In his famous 1974 commencement address at the California
Institute of Technology, he beseeched the graduating class to practice “scientific integrity,”
“utter honesty,” and to “lean over backwards” so as not to “fool ourselves” (and of course
others).44 I believe that this holds for us—teachers of economics as well. Economists should
be held to professional ethics, like other professionals.45 From the very beginning, students
must be made keenly aware of the limitations of real markets as opposed to theoretical ones
for at least four crucial reasons:
1 Half-truths hardly belong in academia at any time, not any more in the beginning of
one’s studies than at the end; omitting important aspects and new developments such
as Herbert Simon’s theory of satisficing or Kahneman and Tversky’s prospect theory is
hardly being “utterly honest.”46
2 It is much more efficient to learn a discipline correctly the first time than to have to
unlearn it and correct it subsequently. It is extremely difficult to unlearn something
once one is socialized into accepting the main tenets of the discipline without learning
about their limitations in the real world. The human mind is not so flexible: once the
neural networks are in place, they are extremely challenging to rewire.47
3 The more “sophisticated” ideas of imperfect markets are not so complicated and can be
explained easily at the 101 level. Neglecting them and focusing on perfectly competitive
markets distorts economic theory to such a degree that students leave the course with
a fundamentally misleading caricature of the real existing economy.
4 Most students of Econ 101 do not continue to study economics, so they are never even
exposed to the more nuanced version of the discipline and are therefore indoctrinated
for the rest of their lives with the idea that markets work perfectly well. This indoctri-
nation played a substantial role in the political developments of the last half-century
in forming an intellectual climate tilted heavily toward the free-market worldview that
came to prevail. Thus, every statement one makes in the classroom ought to be true
and the distinction between theoretical and actual markets clarified and stressed. This
is the case although the instructor is expected to cover a lot of material in the introduc-
tory course. Nonetheless, unless the various perspectives on economics are presented
in a balanced way, the student can only gain a biased perspective on the reliability of
market processes. Quality ought not be sacrificed for quantity.
Many principles’ texts make the argument that one must simplify in order to begin to under-
stand this complex system. However, finding the right balance between simplification and
realism is crucial: oversimplification leads to distortion and to a fundamental misunder-
standing of the application of economic principles to the real world.
An example of the misapplication of economic principles is economists’ unconditional
support of free trade without regard to those who are devastated by the foreign competi-
tion (Chapter 13). The benign neglect of the displaced workers especially in the Rust Belt,
led to a level of frustration that helped elect a candidate who promised to bring those
jobs back even if the promise was based on bait and switch tactics and will not lead to an
Table 1.1 Electoral Votes Needed to Tip the 2016 Presidential Election in Favor of Hillary Clinton
Trump Electoral
Plurality Votes
PA 44,292 20
MI 10,704 16
WI 22,748 10
Total 77,744 46
Source: U.S. Electoral College. “Historical Election Results, Election for the Fifty-Eight Term, 2017–2021.” www.archives.
gov/federal-register/electoral-college/votes/2000_2005.html#2016.
improvement in their lives. Consequently, Dani Rodrik, an economist in Harvard’s Kennedy

School, answered his question, “Are economists partly responsible for Donald Trump’s
shocking victory in the US Presidential election?” in the affirmative.48 Hillary Clinton’s loss
of three of the Rust Belt states—distressed by globalization—tipped the election in favor of
Donald Trump (Table 1.1). His plurality in Pennsylvania, Michigan, and Wisconsin was just
77,744. Thus, if just 39,000 voters had switched their votes (0.6% of the votes cast in
these states for Donald Trump), Hillary would have had a majority in the Electoral College.
Yet, some economists argue that the models can be unrealistic as long as their predic-
tions are correct. But mainstream economics comes up especially short on this account. On
the basis of mainstream models, one would predict that our life satisfaction or happiness
would have increased substantially since World War II. After all, per capita gross national
product (GNP) in real terms increased in the U.S. in the meanwhile by a factor of 3.5. But that
prediction is falsified by the fact that the share of people who report that they are either
happy or very happy has not changed at all in the intervening half-century.49 If anything, it
has fallen. Hence, obviously, the importance of money is overvalued by economists.
Yet, another example in which predictions were completely false is that no mainstream
economists predicted the crisis of 2008. Fed chairman Ben Bernanke expected the sub-
prime mortgages not to destabilize the financial system.50 Geologists are better at predicting
earthquakes than Ben Bernanke was in predicting the Meltdown of 2008. In other words,
when it comes to the major challenges of our time, economic theory has misguided us. So
the argument that economists can predict accurately even with unrealistic models has been
falsified by the evidence.
“It’s Only a Model!”

Economists think in terms of theoretical models expressed in equations or in geometric
diagrams. Blackboard economics is based on assumptions and on conceptualizations of
how the variables of the model interact. Although these appear rigorous, given the obvious
limitations of the human mind, the number of variables must be restricted to a handful in
order for the mathematics to be manageable. While these simple logical constructs can be
quite useful, they are just as likely to be misleading and at times extremely so. And there
is lots of evidence that simple models cannot possibly capture the true nature of our com-
plex economy with thousands of variables and millions of interacting components, which
themselves are embedded in an even larger global framework. So, simplification can render
models destructive, as we saw during the 2008 financial crisis and during the 2016 presiden-
tial election. Unfortunately, much too often the distinction between the world of the model
and reality is not stressed sufficiently so that students and practitioners confuse the two.
Teachers are doing their students a great disservice if they allow them to leave their class-
rooms with the differences between the two worlds blurred in their minds.
The reason is that all too frequently, oversimplified blackboard models are applied to
real-world situations erroneously so that instead of enhancing our understanding, they
obscure, lead us astray, and ultimately become a powerful destructive force. Greenspan and
Bernanke’s overlooking powerful systemic effects—negative externalities—in the financial
sector prior to the run-up to the Great Meltdown is a recent vivid example of the damage of
models applied inappropriately to actual circumstances that exist at street level.51
Similarly, economic models and policy makers overlooked completely the political storms
that were unleashed by the hurricane-size forces of globalization. Politics was not part of
their models and that was supposed to somehow take care of itself. How? Well, that was not
part of the economists’ purview.
Another example is the recurrent misguided application of models of perfect competi-
tion to unions, and to the minimum wage to markets that are far from perfectly competitive
(Chapter 9); after all, today’s insignificant share of economic activity takes place in a
perfectly competitive environment. Thus, an enormous intellectual problem arises in our
culture because the theoretical models are misused every day and especially so in political
discourse.
This is hardly a minor phenomenon. Instead, it is at the root of the current economic,
social, and political malaise—a watershed in U.S. history. Hence, the economics profes-
sion bears the responsibility that the public, the media, and politicians are ill informed
about real-world economics. It has not followed the spirit of Feynman’s admonition,
and did not bend over backwards to explain with sufficient clarity and ample emphasis
the qualifications that accompany the blackboard models. It is insufficient to mention
the assumptions at the beginning of the semester and assume that the students will
remember them throughout the course. We have to be much more careful to delineate
the circumstances under which the models are appropriate to apply to the real world.
Without such clarification most textbooks fail to provide a nuanced understanding of
flesh-and-blood economic processes.
The failure to emphasize real-world economics has immense implications for the body
politic and civil society. The fact that millions of students go on with their lives and years
later choose among political candidates based partly on their economic policies, or become
newspaper editors, radio commentators, small-town mayors, congressional aides, or politi-
cal activists—in other words, their careers take them to responsible positions within the
society—mistakenly think that they have understood the basics of economic theory, that
markets are efficient if left alone. Thus, the deficiencies of Econ 101 become a powerful
damaging force—students become vulnerable to, or perpetrators of, simplistic slogans par-
ticularly vitriolic in the current political climate: “Competition will lead to growth;” “the free
market is efficient;” “lowering taxes will create jobs;” “government is not the solution to
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current, and it should be used in the way that will produce the
greatest amount of excitation in the cutaneous end-organs. This is
best done by applying the faradic current to the dry skin with the
metallic brush, or by allowing the cathode of the galvanic current to
rest upon it for some time.
The PROGNOSIS in peripheral anæsthesia is in the main favorable, but

it must, of course, depend much on the gravity of the lesion causing
it, as mechanical injury, pressure, neuritis, cold, etc. Rheumatic
anæsthesia, the result of exposure to cold, is in general readily
recovered from. Vaso-motor anæsthesia yields in most cases without
difficulty to treatment. Washerwoman's anæsthesia and allied cases
are intractable, and often resist the patient and well-conducted
application of remedies.
As a concrete picture of peripheral anæsthesia we will give a

description of anæsthesia of the fifth nerve—the rather that in its
consideration we meet with some of the most interesting and
important complications occurring in connection with paralysis of
sensitive nerves. The fifth nerve may have either of its three
branches separately affected, giving rise to anæsthesia limited to the
distribution of that branch, or all of its fibres may be simultaneously
involved, giving rise to complete anæsthesia of the nerve. In the
latter case the lesion of the nerve in all likelihood exists at some
point of its course between the apparent origin from the pons and the
ganglion of Gasser, which rests upon the apex of the petrous portion
of the temporal bone. Beyond this point the nerve divides into its
three branches. Amongst the causes of trigeminal anæsthesia are
injuries, tumors, syphilitic thickening of the dura mater, neuritis, etc.,
affecting the nerve within the cranial cavity. In complete anæsthesia
of the fifth nerve the parts implicated are the skin of the forehead to
the vertex, the nose, the lips, and chin up to the median line, the
cheek and temporal region, including the anterior portion of the ear,
the conjunctiva, the mucous membrane of the nose, the mucous
membrane of the mouth, and partly of the fauces of the same side.
The tongue is deprived not only of common sensation on the
affected side in its anterior two-thirds, but the sense of taste is also
lost over the same region, by reason that the fibres of the chorda
tympani, the nerve of taste for this region of the tongue, are derived
from the fifth nerve. If the whole thickness of the nerve-trunk is
involved, including the small motor root, there is, in connection with
the anæsthesia, paralysis of the muscles of mastication on the side
affected, which may be distinguished by the want of hardening of the
masseter when the jaws are forcibly brought together, and by the
thrusting of the chin over to the paralyzed side when the mouth is
widely opened, caused by the want of action of the external
pterygoid muscle, which allows the condyle on the paralyzed side to
remain in the glenoid fossa, while the condyle of the opposite side is
pulled forward upon the articular eminence by the sound pterygoid.
The face is of a dusky or livid color, and cooler than natural. Ulcers
of a stubborn character in the mucous membrane of the cheek may
be caused by the patient unconsciously biting the insensitive parts.
An inflammation of the conjunctiva is frequently set up, which may
extend to the cornea, causing ulceration, perforation,
panophthalmitis, and destruction of the eye (ophthalmia neuro-
paralytica). This has been regarded by some as caused by trophic
changes in the tissues, the direct result of irritation or destruction of
trophic fibres connected with the ganglion of Gasser. Experiments
made upon animals, however, seem to show that the inflammation of
the eye depends upon the irritation caused by the intrusion of foreign
bodies, which, owing to the loss of sensation, are not appreciated,
and which from loss of reflex action are not removed by winking nor
washed away by an increased lachrymal secretion, as in the healthy
eye. It may be that although the latter is the true explanation of the
origin of the inflammation, nevertheless the tissues may have lost
their normal power of resistance to its invasion by reason of nutritive
changes consequent upon the lesion of trophic fibres running in the
trunk of the nerve. The reflexes ordinarily induced by irritation of the
parts in their normal state are lost. Irritation of the conjunctiva causes
no winking of the lids nor secretion of tears, and titillation of the
nostrils no movements of the muscles of the face nor mucous or
lachrymal secretion. The movements of the face are less lively on
the affected side, not on account of paralysis of the muscles, but
from the loss of that constant play of reflex activity in them which
takes place in the normal condition. The loss of the reflexes
distinguishes peripheral trigeminal anæsthesia from that of cerebral
origin, in which they may still be excited by irritating the anæsthesic
surfaces. In trigeminal anæsthesia, which sometimes occurs from
the effect of cold upon the surface of the face, the mucous surfaces
are not affected.
The SYMPTOMS and DIAGNOSIS of peripheral paralysis having been

already given under the heads of Injuries of Nerves and Neuritis, a
consideration of the distribution of any motor nerve will enable us to
anticipate the distinguishing features of the paralysis dependent
upon it. With each the picture will be modified according to the
position of the muscles paralyzed and the motor functions destroyed.
It now remains to give the symptoms, diagnosis, and treatment of the
paralysis of an individual motor nerve, which may serve as an
example and paradigm, in the consideration of which points of
interest and instruction may be touched upon applicable to all other
cases.
Peripheral Paralysis of the Facial Nerve (Bell's Paralysis).
Of all the peripheral paralyses, probably that of the seventh is the

one we are most frequently called upon to treat and the symptoms of
which are the most complex and interesting. The frequency of its
paralysis is due to the length and peculiarity of its course, enclosed
as it is in a bony canal which permits no increase of its volume
without compression, the run of its terminal branches through parts
liable to inflammation and disease (parotid gland), and their final
distribution to parts exposed to all vicissitudes of heat and cold and
in constant danger of mechanical injury. The complexity and interest
of the symptoms of its paralysis depend in a great measure upon the
intimate connections it forms at different points of its course with the
fibres of other nerves of entirely different functions (acoustic and
fifth).
The seventh nerve is liable not only to intercranial compression from
tumors, inflammation of the meninges, syphilitic processes, etc., but
its long course through the petrous portion of the temporal bone
renders it liable to injury from fracture or caries, and its close
proximity to the middle ear causes it often to suffer from the
diseased conditions of the bony walls or mucous lining membrane of
that chamber, its paralysis being not infrequently the result of simple
aural catarrh. After the exit of the nerve from the stylo-mastoid
foramen it is imbedded in the parotid gland, and sometimes suffers
from compression produced by an inflammation or abscess in that
organ or by enlarged lymphatic glands in the neighborhood. Surgical
operations, so often demanded for disease of the bones or soft parts
of the face, may necessitate the lesion of its trunk or branches. The
exposed position of this nerve is sometimes the occasion of its injury
at the very outset of the life of the individual, when the application of
the forceps to the head has been resorted to in delivery. But the
most frequent cause of facial paralysis appears to be the exposure
of one side of the face directly to cold—as sleeping in a draught of
air, sitting at the open window of a railroad coach, etc. Here the
causal connection appears evident from the rapidity with which the
paralysis usually follows, although cases occur in which an interval
of hours or days elapses after the exposure before the paralysis
declares itself. Although this is usually designated rheumatic
paralysis, there is nothing to connect it with that disease, nor are
rheumatics more liable to it than others. Under such circumstances
the paralysis is probably brought about by the occurrence of a
neuritis of the nerve-trunk, which is compressed by the hyperæmia,
and it may be by an inflammatory exudation against the bony walls
surrounding it, until not only does it lose the power of conduction, but
its fibres undergo the degenerative process. In some cases the
neuritis thus excited by exposure to cold attacks the nerve after it
has issued from the bony canal, and then the resulting injury to the
fibres is much less grave. Although in some cases there are
prodromal symptoms, as stiffness or pain in the face, generally the
paralysis occurs suddenly, very often being first observed upon
awaking. The patient may be first made aware of the paralysis by an
inability to drink without the fluid dribbling from the affected side of
the mouth or by the overflow of tears from the eye of the same side.
When the paralysis is recent and the face in complete repose, there
may be little or no deformity to mark the condition of the muscles.
When, however, the patient speaks or the slightest emotional or
reflex movements of the face are excited, as laughing, frowning, etc.,
it becomes obvious from the bizarre grimace caused by a one-sided
contraction. After the paralysis has existed for some time the
contrast of the two sides of the face is marked. The paralyzed side is
characterized by a vacancy of expression to which the staring,
unwinking eye contributes. From loss of the tonicity of the muscles
the angle of the mouth droops, and the expressive furrows and lines
about the brow, below the eye, and beside the nose are smoothed
out and obliterated. Speech is affected, inasmuch as the paralysis of
the lip interferes with the pronunciation of the labials, and all
attempts to purse up the mouth, as in whistling, is abortive. The eye
not only remains open, the lids motionless, but there is partial
eversion of the lower lid (lagophthalmos), and the tears, no longer
directed to the punctum (paralysis of Horner's muscle), flow over the
cheek. The natural impulse to reflex winking caused by evaporation
from the conjunctiva or by the contact of particles of dust is
answered by a rolling of the eyeball upward to wipe the cornea
beneath the momentarily relaxed and drooping upper lid. Excited
respiration causes no movement of the ala of the nose on the
affected side, but in deep inspiration, in contrast to the normal
elevation of the ala, it is flattened down by the suction of the
inrushing current of air. In masticating, the cheek bulges out from
want of power in the paralyzed buccinator to press the food inward
against the opposing movements of the tongue. In persons who
have the rather unusual power of voluntarily moving the ear we may
detect the paralysis of the muscles concerned in those movements—
a useful point in diagnosis. Moreover, on the sound side of the face
the features have not entirely the natural appearance. The angle of
the mouth is drawn upward and the naso-labial line more deeply
impressed than natural. This results not from excessive contraction,
but from the muscles remaining in the position they have taken
during contraction, the antagonistic tonic traction from the opposite
side, which would have restored them to their normal position, being
wanting. This may be in a measure remedied by mechanical
appliances which will keep up an elastic pull from the paralyzed side,
or by restoring the muscles after contraction to position with the
hand. The tongue rests symmetrically in the floor of the mouth, and
is thrust out straight, although in appearance it is pushed toward the
side paralyzed—a deceptive appearance produced by the
asymmetrical position of the mouth. In some cases there is partial
paralysis of the velum palati, the half arch on the affected side
hanging lowest, and if we cause the patient to make the sound of ah
the opposite side of the palate is alone drawn upward. The uvula
may also participate in the paralysis, but the explanation of its
position, sometimes directed away from, sometimes toward, the side
of the paralysis, cannot be given. In proportion to the amount of the
paralysis of the soft palate will be the prominence of the symptoms
caused by it, such as difficulty in deglutition, a nasal tone in
speaking, and the escape of fluids through the nostril in swallowing.
The sense of hearing is often affected coincidently with facial
paralysis. Thus by reason of their close juxtaposition the same cause
may in common affect the acoustic and the facial, causing imperfect
hearing, subjective noises, etc. The hearing is frequently affected by
diseased conditions of the middle ear, which also cause a facial
paralysis. Still another defect of hearing, however, is caused by the
paralysis of the facial nerve itself. The stapedius muscle, supplied by
a branch of the facial, is the antagonist of the tensor tympani, and
when it is paralyzed the over-tense tympanic membrane vibrates
more readily to sound-waves, and a condition of uncomfortably
exaggerated sensitiveness to sounds is the result (hyperacuisis).
The rarely-occurring symptom of dryness of the mouth on the side of
the paralysis receives its explanation in the well-known fact of the
presence of secretory fibres for the salivary gland in the chorda
tympani, which are derived from the facial. We observe sometimes,
in connection with facial paralysis, that the patient complains of
certain subjective sensations of taste, as sour or metallic, and an
examination will in some cases reveal that the sense of taste is lost
on the anterior two-thirds of the tongue on the side of the paralysis.
The fibres which convey the sense of taste pass centripetally from
the tongue in the chorda tympani nerve, join the facial just within the
stylo-mastoid foramen, and continue united with it to the geniculate
ganglion of the facial, at which point they leave it to pass in the great
superficial petrosal to the spheno-palatine ganglion, and thence to
the trunk of the fifth nerve. Loss of sensation over the face only
occurs in cases where the fifth nerve has been simultaneously
affected with the facial, which may occur from exposure to cold.
It is obviously of importance in cases of facial paralysis to determine

if they are of central or peripheral origin. The most prominent
symptoms which mark a peripheral paralysis are the implication of all
the branches of the nerve, the loss of the reflexes, the development
of the degenerative reaction, and atrophy of the muscles. In facial
paralysis of cerebral origin the frontal and orbital branches are not at
all or but slightly affected, leaving the eye with its natural
appearance, in contrast to the lagophthalmos, and the open eye
which does not close even in sleep. In cerebral paralysis the reflexes
are normal and the muscles retain their natural electric reaction.
Accompanying brain symptoms assure the diagnosis. In facial
paralysis of bulbar origin the electric reactions are diminished, and
we have a complex of symptoms made up in a great measure by the
implication of neighboring nerves. After the diagnosis of a peripheral
facial paralysis has been made, by a careful consideration of the
symptoms we may with more or less accuracy determine at which
point of the nerve the lesion is situated. If there is paralysis of all the
muscles of the face, without alteration of taste or hearing, the electric
reaction of nerve and muscles normal, the nerve is affected outside
of the stylo-mastoid foramen. This is usually the form of slight
rheumatic paralysis. If we discover that the muscles of the external
ear are paralyzed, it shows that the point of lesion is just within the
stylo-mastoid foramen, where the posterior auricular branch is given
off from the facial. If with paralysis of the face there is alteration of
the sense of taste, with dryness of the mouth, without interference
with hearing, the trunk of the nerve is affected within the Fallopian
canal, involving the chorda tympani fibres below the point where the
stapedius nerve is given off. If to the above symptoms there is added
over-sensitiveness to sounds, hyperacuisis, and there is no paralysis
of the palate, we have the nerve affected still higher up, but below
the geniculate ganglion. If the geniculate ganglion is involved, there
is, in addition to the foregoing, symptoms of paralysis of the palate.
If, now, the lesion is above the geniculate ganglion, we will have
eliminated the symptom due to implication of the chorda tympani,
which leaves the trunk of the facial at the geniculate ganglion, and
the sense of taste is unaffected, while there remains paralysis of the
face, dryness of the mouth (the secretory fibres run in the trunk of
the seventh), hyperacuisis, and paralysis of the palate.
It was in facial paralysis that the first observations upon the

degenerative reaction in muscles were made, and it is in that
affection that these electric phenomena have been best studied, and
give us the clearest indications for prognosis and treatment in
peripheral paralysis generally. In rheumatic facial paralysis, the most
common form of peripheral facial paralysis, the electric reactions of
the paralyzed muscles enable us to classify the cases into three
groups, the prognosis and duration of which vary very much. In the
first group are the slight forms of facial paralysis. Here the faradic or
galvanic current, applied to nerve or muscles, causes an ordinary
contraction; the electric reactions are normal. These cases scarcely
require treatment, and recover in two or three weeks. In a second
group are those cases in which within a short time after the invasion
of the paralysis (two weeks) complete degenerative reaction is
observed. This degenerative reaction, with the accompanying
anatomical changes in nerve and muscle, has already been treated
of in this article, and it is sufficient here to say that it is marked by
total loss of electric excitability, both faradic and galvanic, in the
nerve, loss of faradic and increased galvanic excitability in the
paralyzed muscles, with a reversal of the normal reply of the
muscles to the different poles of the galvanic battery. These cases
constitute the severe form of rheumatic facial paralysis, and the
prognosis is grave, recovery takes place only after months, and even
after the lapse of years traces of the disease remain in the imperfect
action of the muscles. A third group of cases are of a gravity
intermediate between these two. In them is present the milder form
of degenerative reaction; that is, there is a diminution, but not a total
loss, of electric excitability in the nerve for both the galvanic and
faradic currents; but in the muscles there is a marked increase of
galvanic excitability, with qualitative change—i.e. greater contraction
upon application to them of the positive than of the negative pole.
These cases may be expected to recover in from four to eight
weeks, the muscles still exhibiting the degenerative reaction after
voluntary motion has returned. Among the symptoms to be
particularly noticed in the progress of the severe forms of facial
paralysis are spasmodic twitchings or spasms of the muscles on the
affected side of the face, about the angle of the mouth, and around
the eye, occurring spontaneously or when voluntary movements are
made. Also a state of tonic contraction and rigidity may develop in
some of the muscles, causing a permanent elevation of the angle of
the mouth, a narrowing of the opening of the eye, or a rigidity of the
cheek. These symptoms have been erroneously attributed to the use
of electricity in the treatment, but they occur as frequently in cases in
which it has not been employed. Traumatic facial paralysis, as from
wounds, surgical operations, use of the forceps in delivery, or
paralysis from compression of the nerve, as from tumors, syphilitic
thickening of the dura mater, etc., do not require a detailed mention
here, as such cases come under the head of nerve-injuries, already
discussed. Paralysis of both facials (diplegia facialis), in so far as it is
caused by peripheral nerve lesion, is an accidental occurrence, and
need not be considered as a separate form of facial paralysis. It is
often the result of central disease.
The TREATMENT of peripheral facial paralysis must begin with the

effort to remove its cause. If syphilis is suspected, mercury and
iodide of potassium must be freely used. If the cause is an affection
of the middle ear, this must be treated. Wounds or traumatic injuries
must receive the necessary surgical attention. In addition, in such
cases electricity must be employed in the manner presently to be
described. In cases of rheumatic facial paralysis the treatment will
vary with their gravity. In the lighter form in which the nerve is
affected outside of the Fallopian canal, recovery takes place in a
comparatively short time, even without treatment, but is hastened by
the use of the faradic or galvanic current daily along the branches of
the nerve. In the severe form we must open the treatment by an
attempt to combat the condition of inflammation—of inflammatory
exudation—which we suppose exists within the Fallopian canal.
Local blood-letting by leeching upon the mastoid process may be
appropriately used in the very first outset of the paralysis. Iodide of
potassium, given persistently in large doses during the earlier period
of the disease, appears to act beneficially independently of any
syphilitic taint. Electricity is the remedy, however, on which most
reliance is to be placed in the treatment of rheumatic facial paralysis,
and the manner of its application may be taken as a model of how it
should be employed in all cases of peripheral paralysis. The galvanic
current, on account of its power of penetrating to the deeper parts
and its catalytic action, is to be preferred for the direct electrical
treatment of the nerve which should be instituted in recent cases. Its
action is best obtained by placing the positive pole behind the ear on
the affected side, the cathode behind the opposite ear, and passing
a moderate current across the base of the skull (the affected nerve
being thus in the course of the current) for one or two minutes.
Occasionally the position of the poles may be reversed. Besides this
direct application of galvanism to the point of lesion, it is necessary
to make a peripheral application of electricity to the branches of the
nerve and to the paralyzed muscles. For this we use both the faradic
and galvanic currents. The galvanic current is used by applying the
positive pole stationary behind the ear, while the negative pole, with
an electrode of suitable size, is stroked over each branch of the
nerve and applied to each muscle, a current being used sufficiently
strong to produce decided contractions. This peripheral application
should be made once daily, the time of application being from two to
five minutes. The application of the faradic current is made by simply
placing one electrode upon an indifferent spot, and moving the other
over the face, with a current strong enough to cause contractions if
the muscles still respond to it, or if they do not of such strength as
the patient can bear without discomfort. Without doubt, one of the
beneficial effects of peripheral electrization is the reflex excitement of
the facial above the point of lesion through the irritation of the
terminations of the fifth nerve in the skin. A certain advantage
derived from it is that it maintains the tone of the paralyzed muscles,
which in the case of the orbicularis palpebrarum is of great
importance in preventing the eversion of the lower lid and the
overflow of the tears. As it is impossible during the first days
succeeding the paralysis to distinguish severe cases from those of
the middle form, it is best to begin the treatment of all cases in the
manner above described. The use of strychnia in rheumatic facial
paralysis, both internally and by hypodermic injection, may be
mentioned on account of the widespread preposession in its favor,
and to point out distinctly its utter futility.
Mechanical appliances and manipulation are used with advantage in

the treatment of facial paralysis to prevent the paralyzed muscles
about the mouth and cheek from being drawn out of place and over-
stretched by the action of the sound ones of the opposite side, thus
having their tonicity and nutrition impaired.
Contractions and rigidity of muscles receive little benefit from the use
of electricity, and must be treated by mechanical procedures, such
as stretching, massage, etc.
Neuromata.
The term neuromata was applied to all tumors involving the nerve-
trunks at a time when their histological differences had not been
studied and they were all supposed to be composed of nerve-tissue;
and even yet the name is conveniently retained, because, although
differing widely histologically, tumors situated upon the nerves have
a very similar clinical history.
Neuromas must be divided into true and false, the true consisting of
nerve-tissue, the false, or pseudo-neuromas, being composed of
many varieties, having this only in common, that they are seated
upon the nerves.
The true neuromas are again subdivided into those in which the
nerve-tissue composing them resembles exactly the fibres of the
peripheral nerves, showing with the microscope the double-
contoured white substance of Schwann surrounding an axis-cylinder,
and those in which the tumor is made up of fibres which Virchow has
shown to be non-medullated nerve-fibres—i.e. the axis-cylinder
without the white substance of Schwann. These two forms have
been distinguished by the names myelinic and non-myelinic. The
true neuromas are non-malignant, although showing the tendency to
recur after extirpation, are of slow growth, and as a rule do not
increase to a very great size. The best type of the myelinic neuromas
is found in the spherical or spindle-shaped enlargements at the cut
ends of nerves, particularly in the stumps of amputated limbs, where
they are found oftenest intimately connected with the cicatricial
tissue, though sometimes lying free. They consist of true medullated
fibres mixed with some fibrous tissue. The fibres composing them
are derived partly from splitting up and proliferation of the fibres of
the nerve itself, partly are of new formation, the appearances
strongly recalling the process of regeneration in nerves. Myelinic
neuromas consist of fibres and nuclei so closely resembling in
microscopic appearance the fibromas that they have hitherto been
confounded with them; and there is a difference among the highest
authorities as to the certainty of their diagnosis, and, in
consequence, of the frequency of their occurrence. The true
neuromas may include in their structure all of the fibres of the nerve-
trunk or only a portion of them (partial neuroma)—a fact of
importance in their symptomatology. Of the false neuromas, the
fibromas are by far the most frequently met with. They appear as
knots, more or less hard, upon the course of the nerve-trunk, which
they may involve completely or partially. They are often excessively
painful to the touch or spontaneously, most of the so-called tubercula
dolorosa belonging to the fibro-neuromas. Fibromas sometimes
occur along the trunk and branches of a nerve, forming a plexus of
knotted cords (plexiform neuroma). Fibro-sarcomas are not an
infrequent form of neuroma.
Myxomas often occur upon the peripheral nerves, and are frequently
multiple, their points of predilection being the larger trunks, as the
sciatic, ulnar, etc. They show their characteristic soft structure, and
are usually spindle-shape, assuming a rounder form as they attain a
large size. The various forms of sarcoma occasionally form tumors
upon the nerves, attacking generally the large trunks. Carcinomatous
tumors beginning upon the nerves sometimes occur, but as a rule
these growths involve the nerve by extension to it from adjacent
parts.
Syphilitic gummata have been found almost exclusively upon the

intracranial portion of the cranial nerves.
Gliomas appear to affect only the optic and acoustic nerves. Lepra
nervorum (lepra anæsthetica) produces usually a spindle-form
thickening upon the nerve-trunks, but sometimes there are more
distinct knots, which may be felt beneath the skin, bead-like, along
the course of the nerves of the extremities.
Like the true neuromas, the false neuromas, developing from the
neurilemma and perineurium, may involve the whole or only a part of
the fibres of a nerve, or the nerve-fibres may run at the side of the
tumor—different conditions, which may alter materially the effects
produced upon the nerve.
Neuromas, both false and true, may occur not only singly, but often
in large numbers, many hundreds having been counted upon an
individual. Sometimes they are numerous upon a single nerve-trunk
and its branches, and again they may appear scattered over nearly
all of the nerves of the body, even to the cauda equina and roots of
the nerves. According to Erb,9 isolated neuromas are more frequent
in females, while multiple neuromas are found almost exclusively in
men. Neuromas vary greatly in size, as we might expect from the
very great difference of their nature and structure; sometimes no
larger than a pea, they may attain the size of a child's head.
9 Ziemssen's Handbuch.
ETIOLOGY.—In cases of multiple neuromata it would seem as if there

was a constitutional condition or diathesis as the foundation of the
affection. This we may the more readily believe as there appears
good evidence to show that the tendency to the formation of these
nerve-tumors is sometimes hereditary, and some of them are
congenital.
Idiots and cretins have been observed to suffer in undue proportion

with multiple neuromas. We find a direct exciting cause of neuromas
in mechanical injuries of nerves, wounds, blows, pressure, etc. Thus,
as has been already seen, true neuromas occur in the divided ends
of the nerves after amputations or otherwise where a nerve-trunk
has been divided (cicatricial neuroma). As such neuromas are in
some degree the result of inflammation, it is probable that they may
sometimes be caused by chronic neuritis.
For a large number of neuromas no cause can be assigned, and we

must at present consider them as originating spontaneously.
SYMPTOMS.—The position and connections of neuromas being so

different, sometimes simply in contact with the nerve; sometimes
situated in the thickness of the nerve-trunk, the fibres being pressed
aside and spread out upon the surface of the tumor; sometimes
involving in their tissue a part or the whole of the nerve-fibres,—we
cannot but expect a very marked difference in their clinical history.
Not a few cases occur in which the presence of neuromas, even in
large numbers, gives rise to no symptoms during life, and their
existence has been revealed only upon a post-mortem examination.
The symptom most common to neuromas, and one to be expected

from their mechanical interference with the nerves, is neuralgic pain
—sometimes extreme, local or shooting along the course of the
nerves, stubborn, and hardly to be alleviated by remedies. It is
paroxysmal, notwithstanding the unvarying character of its cause, in
consonance with the tendency to periodical activity which prevails in
the nervous system. Sometimes the pain is increased notably by
atmospheric changes. The pain may sometimes be arrested by firm
pressure upon the nerve above the seat of the tumor. In some cases
pressure upon the neuroma, or even handling it, causes great pain.
The intensity of the pain does not depend upon the size of the tumor,
some of the smallest having earned the appropriate name of
tubercula dolorosa. The continued irritation of a neuroma sometimes
produces a condition of general nervous excitability, which shows
itself in hysterical and even in true epileptic convulsions.
Occasionally there are abnormal sensations (paræsthesiæ),
formication, numbness, etc., in the distribution of the nerve affected,
and when from pressure or histological changes the fibres are
destroyed anæsthesia results.
The interference with the conductivity of the motor fibres, which

occurs less frequently than alterations of sensation, shows itself in
cramps, tumors, paresis, and paralysis, according to its degree.
Neuromas may destroy life by the continued excessive pain, which

wears down the strength and depresses the vitality. Death may be
caused by their peculiar situation; as, for instance, upon the cauda
equina, where they produce paraplegia, paralysis of the sphincter
and bladder, and trophic changes.
The DIAGNOSIS of neuromas can only be made when they are

sufficiently superficial to be recognized by the touch, and along with
the symptoms above detailed the tumor is situated upon the known
course of a nerve, to which, moreover, its attachment allows a lateral
movement.
The only TREATMENT available for neuromas is extirpation, which must

be conducted with a view to sparing any fibres of the nerve not
involved in the tumor. Where it is necessary to divide the nerve in the
removal of the tumor, as small a portion as possible must be
excised, with the hope of a regeneration and reuniting of the cut
ends. The success of extirpation depends largely upon the nature of
the neuroma. The true neuromas, while they often show a strong
tendency to recur after removal, are benign and show no metastasis.
For the false neuromas the prognosis will be in accordance with their
benign or malignant character.
NEURALGIA.
BY J. J. PUTNAM, M.D.
DEFINITION.—It is customary to describe as neuralgic those pains for

which no adequate cause can be assigned in any irritation of the
sensory nerves from outside, which recur paroxysmally, are
unattended by fever, and are distributed along the course of one or
more nerves or nerve-branches.
The general use of the term neuralgia further implies the common
belief that there is a disease or neurosis, not covered by any other
designation, of which these pains are the characteristic symptom. Of
the pathological anatomy of such a disease, however, nothing is
known; and if it could be shown for any given group of cases that the
symptoms which they present could be explained by referring them
to pathological conditions with which we are already familiar, these
cases would no longer properly be classified under the head of
neuralgia.
The attempt has frequently been made, and on good grounds, in

obedience to this reasoning, to cut down the list of the neuralgias,
strictly so called, and to account for many of the groups of symptoms
usually classified under that head by referring them to anæmia or
congestion of the sensory nerves, to neuritis, etc.
One of the best and most recent statements of this view is that of
Hallopeau,1 who, although he does not wholly deny the existence of
a neurosis which may manifest itself as neuralgia, goes so far as to
maintain that the gradual onset and decline and more or less
protracted course so common in the superficial neuralgias, such as
sciatica, suggest rather the phases of an inflammatory process than
the transitions of a functional neurotic outbreak, and that, in general
terms, a number of distinct affections are often included under the
name of neuralgia which are really of different origin, one from the
other, and resemble each other only superficially. This subject will be
discussed in the section on Pathology, and until then we shall, for
convenience' sake, treat of the various neuralgic attacks as if they
were modifications of one and the same disease.
1 Nouveau Dict. de Méd. et de Chir. pratiques, art. “Névalgies.”
GENERAL SYMPTOMATOLOGY.—The neuralgias may be conveniently

divided into—1, external or superficial; 2, visceral; 3, migraine and
the migrainoid headaches.
Superficial Neuralgia.
The most prominent symptom of a neuralgic attack of the superficial

nerves is of course the pain, and sometimes, from first to last, no
other sign of disease is present. In an acute attack the pain is usually
ushered in by a sense of discomfort, which the patient vainly tries to
shake off, or by a feeling of weight and pressure or of numbness and
prickling, or of itching. Sometimes, though far less often than in the
case of migraine, there are prodromal signs of a more general
character, such as a feeling of thirst2 or of mental depression or
drowsiness.
2 Spoken of by Mitchell's patient with neuralgia of the stump (see below).
A dart of pain may then be felt, which soon disappears, but again
returns, covering this time a wider area or occupying a new spot as
well as the old. The intensity, extension, and frequency of the
paroxysms then increase with greater or less rapidity, but, as a rule,
certain spots remain as foci of pain, which radiates from them in
various directions, principally up or down in the track of the nerve-
trunk mainly implicated. The pain rarely or never occupies the whole
course and region of distribution of a large nerve or plexus, but only
certain portions, which may be nearly isolated from one another.
In an acute attack the affected parts may at first look pale and feel
chilly, and later they frequently become congested and throb.
Mucous surfaces or glandular organs in the neighborhood often
secrete profusely, sometimes after passing through a preliminary
stage of dryness.
The skin often becomes acutely sensitive to the touch, even though
firm, deep pressure may relieve the suffering. Movement of the
painful parts, whether active or passive, is apt to increase the pain.
When the attack is at its height, the pain is apt to be felt over a larger
area than at an earlier or a later period, and may involve other
nerves than those first attacked. Thus, a brachial becomes a cervico-
brachial neuralgia or involves also the mammary or intercostal
nerves. A peculiarly close relationship exists between the neuralgias
of the trigeminal and of the occipital nerves. It is said that when the
attack is severe the corresponding nerves of the opposite side may
become the seat of pain. This is perhaps remotely analogous to the
complete transference of the pain from one side to the other which is
so characteristic of periodical neuralgic headaches, especially if they
last more than one day.
Some cutaneous neuralgias pass away after a few hours' or a night's

rest, after the manner of a migraine or a headache, and patients in
whom this takes place are, as a rule, constitutionally subject to
neuralgia or other neuroses. Toward the end of such an attack there
is often a copious secretion of pale, limpid urine. In a large class of
cases, on the other hand, the attack is of several days' or weeks', or
even months' or years', duration, with remissions or intermissions
and exacerbations, which may be either periodical or irregular.
The most marked periodicity of recurrence is seen with the

neuralgias of malarial origin, which may take on any one of the
typical forms of that disease.
These malarial neuralgias affect pre-eminently, though not

exclusively, the supraorbital branch of the fifth nerve; but it should
not be forgotten that there is also a typically periodical supraorbital
neuralgia of non-malarial origin, of which the writer has seen several
pronounced examples, the pain usually recurring regularly every
morning at eight or nine o'clock and passing away early in the
afternoon. The same periodicity is seen, though less often, in other
neuralgias. Thus, Trousseau3 speaks of neuralgic attacks from
cancer of the uterus in a young woman, which recurred daily at
exactly the same hour. Some of the traumatic neuralgias show the
same peculiarity to a marked degree.
3 Clin. Méd.
In many neuralgias, on the other hand, the exacerbations are worse

at night, like the pains of neuritis. In the intervals between the attacks
the pain may be wholly absent, or may persist, usually as a dull
aching.
After a neuralgia has lasted a few days—sometimes, indeed, from

the outset if the attack is severe—it is usually found that definite
spots of tenderness have made their appearance at certain limited
points on the course of the nerve. These are the famous points
douloureux which Valleix described with such minute accuracy,
believing them to be invariably present in true neuralgias. This is
certainly not strictly the case, though they are very common. They
are not necessarily coincident with the foci of spontaneous pain, as
Valleix supposed, but do correspond in general to the points at which
the affected nerve emerges from its bony canal or from deep
muscles and fascia, and to portions of its area of distribution in the
skin. The spinous process corresponding to an affected spinal nerve
may also become tender, but this is probably to be looked on, like
the same symptom in so-called spinal irritation, not as a sign of local
disease, but as due to a general reaction on the part of the nervous
system, and as a fact of a different order from the tenderness along
the nerve.
The termination of an acute neuralgic attack is usually gradual, like

its onset, although in some cases of headache, and in other
neuralgias to a less degree, there comes a moment when the patient
suddenly declares that he is free from pain.

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1 Welcome to Real-World Economics 1

2 Markets Are Neither Omniscient Nor Omnipotent 19

3 The Nature of Demand 39

4 Homo Oeconomicus Is Extinct: The Foundations of Behavioral Economics 57

5 Taste Makers and Consumption 81

6 Firms and Imperfect Competition 99

7 Returns to the Factors of Production 109

Income Distribution 122

8 The Case for Oversight, Regulation, and Control of Markets 142

9 Microeconomic Applications on and off the Blackboard 159

10 What Is Macroeconomics? 172

11 Macroeconomics Part II 189

Missing Markets 198

12 Macroeconomics Part III 205

13 International Trade: Open Economy Macroeconomics 219

14 The Financial Crisis of 2008 231

15 Conclusion: The Foundations of Real-World Economics 265

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