Keynes and Modern Economics (Routledge Studies in the History of Economics)

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foxttodaniggei.ml/schizophrenia/the-young-infidel-by-a.pdf He is not suggesting that greed is good, even if economists often invoke the founding father in a way consistent with such a view. Such an Adam Smith is an early Chicago economist, ready-made for an anti-Big Government and non-interventionist free marketeer climate Stigler The Adam Smith problem Smith was a professor of moral philosophy and part of the Scottish Enlightenment, a school of thought based on natural theology.

There are natural laws that can be grasped and are best followed to improve society. Rulers should not use their power to confer special privilege or to impose restrictions on initiative. Against the interventionist understandings, Smith offered the model of an atomistic marketplace where the invisible hand was free to do its miraculous work of turning self-interest into social good. These are the aspects of WN that mainstream economists stress, although it is also recognized that Smith railed against power being usurped by big business and their allies in government and used against the working people.

  • History of economic thought.
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  • Frozen in Time.

A second concept that Smith famously offered, the division of labor limited only by the extent of the market specialization of labor functions to increase efficiency , led to the optimistic conclusion that as output increased, cost per unit would fall and living standards would go up. There is a natural development in which stimulating trade or even private entrepreneurs choosing to invest their capital abroad has harmful consequence.

Modern economists have, however, picked up on a different aspect of his thinking. The gains for the privileged are not only unfair but amount to less than the losses accruing elsewhere. An impartial state should reduce disincentives by keeping taxes low, regulation minimal, and not allowing certainly not supporting monopoly franchises.

The state was to maintain inter-individual justice, defense, and essential public works Viner There was a natural order which, if left to function, would serve best. The intellectual impact of Newtonian laws of gravity suggested that the real if invisible structures of the world are subject to human understanding. Even though he wrote in the years when James Watt perfected a steam engine that freed manufacturers from dependence on water and animal power, there is remarkably little about real technology in his book.

It may be noted that Smith failed to recognize the onset of the industrial revolution happening around him. The pin factory is the only example of industrial production described in WN, and it is a childhood memory of a small nailery on the outskirts of the then insignificant village of Kirkcaldy Gray Smith combined an appreciation of the productive potential of specialization with the natural liberty doctrine of his time. The linking of political freedom and economic freedom was both a continuation of moral philosophy and at the same time a departure from it.

So much is familiar Adam Smith canon lore; but this is far from all Smith has to say on the good society and how it should function. A small minority of economists have actually read The Wealth of Nations. Much of what Adam Smith: contestation and canonicity 37 Smith wrote was not economics as the subject is now construed. This by itself would not suffice to explain the situation, since economists do not hesitate to apply their science to issues of the family, crime, and other applications far from its traditional core.

It is that when Adam Smith writes on other topics, the manner of approach is often not congenial to modern economics. Smith seems from the vantage point of modern economics to be schizophrenic. He situated his own ethical positions with Voltaire and Racine, not Gecko and Milken. The answer given by ethicist Larry Rasmussen is a more fitting reconciliation: [I]t is crucial to note that Adam Smith did not trust the morality of the market as a morality for society at large.

He in fact did not even envision a capitalist society. He envisioned a capitalist economy within a society held together by noncapitalist moral sentiments. Is it the case that in both works social passions and interests are as important as self-interest? It came more easily to an eighteenth-century intellectual to suppose that society could function within an institutional framework of order and justice with moral grounding than it does to twentieth-century thinkers. The term moral philosophy is often misunderstood. In its eighteenth-century usage, philosophy meant the sciences and moral philosophy concerned the social sciences.

Natural philosophy meant the physical sciences and mathematics. The standard course in moral philosophy included natural theology, ethics, jurisprudence, public finance, and 38 Reconstructing Political Economy economics. There is in Smith more of the Old Testament prophet than of the apologist for greed.

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Self-interest must have a stabilizing social context. This is clear from a close reading of WN and is amplified in the greater corpus of his writings. My special purpose is to note that for Smith labor is not just a commodity. He does not present land, labor, and capital as conceptually comparable categories. They are not factors of production outside of socially determined definitions and relations that are daily contested.

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A History of Utilitarian Ethics: Studies in Private Motivation and Distributive Justice, Divine Providence in Early Modern Economic Thought book cover. Keynes's Vision. Why the Great Depression Economics and Human Flourishing in Historical Perspective, 1st Edition. By Luigino Bruni of Economics · Classical Economics and Modern Theory: Studies in Long-Period Analysis, 1st Edition .

The idea is presumed a riposte to the teachings of the Church, in which generosity and kindness to others and a sense of harmony and order in society were accepted as natural. Smith turns the moral world on its head by offering self-interest as the motor force for human improvement and societal wellbeing; but he does more than just that.

He presents a model of capitalism that, whilst stressing the harmony brought about by free competition, does not omit the class nature of society, and the manner in which public power could promote inefficiency and private gain through illegitimate redistribution. Technically, he offers an understanding of price formation, value theory, the circulation of money, foreign trade, economic classes, Adam Smith: contestation and canonicity 39 the productive potential and the alienation implicit in the division of labor, and, of course, the nature and causes of the wealth of nations.

Singling out the invisible hand, as economists too often do, is a suspect enterprise. As Jerry Evensky writes of the relation of ethics to early economic liberalism: Ethics is the sine quae non of the constructive competition envisioned by classical liberalism. Only in a community of ethical individuals can the invisible hand do its job properly, for it is ethics that keeps the hands of individuals from disabling, and thus distorting the actions of, the invisible hand.

In the absence of such an ethical community, competition becomes destructive. Evensky Patricia Werhane offers what I think is a correct judgment, that For Smith, the invisible hand is a result of economic interchanges, not the engine that drives these exchanges. Werhane The invisible hand is created out of competition among individuals and can arbitrate the market only if there is a more or less fair balance among the competing actors.

It controls self-interest only to the extent that there is a balance of interests in the market. It is not the market that assures this, but rather the balance among participants. He saw a wide and elastic range of activity for government, and he was prepared to extend it even farther if government, by improving its standards of competence, honesty, and public spirit, should itself be entitled to wider responsibilities…. It depended on circumstances. Viner —13 Smith commented positively on surprising interventionist state activities.

He describes their plight in graphic detail. Even in the celebrated writings on the dynamic benefits of the division of labor, he coupled these gains to an awareness of the harm done to the workers. The cost to working people of the celebrated division of labor was severe: Where the division of Labour is brought to perfection, every man has only one simple operation to perform; to this his whole attention is confined, and few ideas pass in his mind but what have an immediate connection with it….

It is remarkable that in every commercial nation the low people are exceedingly stupid…. Another inconvenience attending commerce is that education is greatly neglected…. But, besides this want of education, there is another great loss which attends the putting of boys too soon to work…. When he is grown up he has no ideas with which he can amuse himself. His sympathies were evident: Wherever there is great property, there is great inequality.

For one very rich man, there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many. The affluence of the rich excites the indignation of the poor, who are often driven by want and prompted Adam Smith: contestation and canonicity 41 by envy to invade his possessions. It is only under the shelter of the civil magistrate that the owner of that valuable property…can sleep a single night in security.

Smith Smith criticizes the non-productive classes that make claims on the productive ones, and also those among the productive, the merchants and manufacturers, who create the goods we require for our wellbeing. He worries that they profit overly by collusion and other unjust acts if they are not restrained. His mechanism for such restraint was understandably not the state, which in his time he saw as corrupt—the granter and enforcer of monopoly privilege—not the vehicle for promoting just dealings. Yet it is hardly true that he was ready to rely on markets outside of a supporting social context.

He worried about class conflict that resulted from gross inequality. Inequalities of reward were not, in his mind, justified by differences in natural talent, as Locke or Madison for example, assumed. Smith wrote: The difference of natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause, as the effect of the division of Labour.

The difference between the most dissimilar characters, between a philosopher and common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education. Smith However small the innate differences among men and women of very different stations in life, The man whose life is spent performing a few simple operations, of which the effects are, perhaps, always the same, or very nearly the same, …has no occasion to exert his understanding, or to exercise his invention in finding out expedients for difficulties which never occur.

He naturally loses, therefore, the habit of such exertions and generally becomes as stupid and ignorant as it is possible for a human creature to become. The difference in compensation compounds the plight of workers. Whilst later economists attributed low wages to low productivity, Smith suggests it is the job that diminishes the worker, rather than the diminished worker who deserves only the limited value of his or her physical product, as the neoclassicals 42 Reconstructing Political Economy were to suggest.

Difference in class position figured prominently in the outcome of the wage bargain. He wrote: The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of workers. We have no acts of parliament against combining to lower the price of work; but many against the combining to raise it. Smith 17 The working men soon became desperate and must either starve or frighten their bosses into granting concessions, said Smith.

But when they try to do so, the employer class can seek assistance from the civil magistrate, which usually results in the ruin of the workers and the jailing of their leaders. Furthermore, the masters collude to keep down wages although this is rarely discussed in polite company, while if workers combine the magistrate is quickly upon them. Smith reports that a carpenter in London, and in other places as well, is not supposed to last in his utmost vigor more than about eight years. Writing here too with a very modern spirit, he suggests that masters working their employees to the breaking point would instead do better to ease up so that they could do better work and last.

This explanation now goes by the name of efficiency wage theory. Such long-run thinking embraced the importance of public funding of quality education and an inclusive stance towards the entitlements of citizenship. Like modern liberals, when he speaks of efficiency he has in mind both social efficiency Adam Smith: contestation and canonicity 43 and equity. In his great society, decent treatment of all members was the sign of civilized accumulation.

No society can surely be flourishing and happy, of which the far greater part the members are poor and miserable. It is but equity, besides, that the whole body of the people, should have such a share of the produce of their own Labour as to be themselves tolerably well fed, clothed and lodged. The proper use of all members of the workforce count. Justice requires adequate compensation and the wealth of the nation demands the proper deployment and efficient use of labor. We waste people most prodigiously.

Not ready to write-off the hard core unemployed or to blame the poor, Smith believed that there was nothing natural about poverty in the midst of plenty. Our own contemporaries who invoke Smith as the patron saint of free markets are not troubled by such errors, for their Adam Smith shows little interest in the happiness and comfort of the lowest orders of society. It needs be stressed that Smith certainly did not accept significant unemployment as natural, or a matter of moral blemish among the poor.

In the last chapter we saw how far Adam Smith is from accepting the isolated individual of the Robinson Crusoe neoclassical economics fable, which is still the starting point for mainstream economic analysis. Smith would not have us forget the hands of those who prepare our bread and our beer, and fashion the glass window that lets in the light and keeps out the rain. These were not matters of minor transition costs to a new equilibrium situation. Moreover, the isolated profit maximizer of the economist myth bears little relation to the social character of the life of the period in which masters and men were imbricated in overlapping networks of group identity.

In the eighteenth century, the characteristic instrument of social purpose was not the individual but the club, and that concept extended from the cock-and-hen club of the tavern to the literary group of the coffee house, from the Hell Fire Club of the blasphemers to the Holy Club of the Wesleys. The pinmakers of Bristol and Gloucester had their own organizations, as did the silver plate makers of Sheffield and the file makers of Warrington. Monopoly is inefficient for reasons he made familiar to subsequent students of economics.

Smith also approved the prevailing restriction of the maximum interest rate to 5 per cent, on the ground that if a higher rate were current, the greater part of the money which was to be lent, would be lent to prodigals and projectors, who alone would be willing to give this high interest…. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were likely to waste and destroy it.

Smith To those who justify financial deregulation and the speculative excesses of the s, the mergers and acquisitions, leveraged buyouts, debt pyramiding, use of junk bonds, and other such innovations on the grounds that the free market knows best and the invisible hand works it all out, such statements should at a minimum give pause for thought. Smith is hardly the prophet of the decade of Adam Smith: contestation and canonicity 45 greed, as those young men in red suspenders are wont to claim.

Rather than advocating freedom of investors, Adam Smith saved some of his most critical comments for rootless transnational capital. He is worth quoting at length on the matter because it introduces us to the larger issues involved in the use to which he employs his most famous construction—the invisible hand. A merchant, it has been said very properly, is not necessarily the citizen of any particular country. It is a great measure indifferent to him from what place he carries on his trade; and a very trifling disgust will make him remove his capital, and together with it all the industry which it supports, from one country to another.

No part of it can be said to belong to any particular country, till it has been spread as it were over the face of that country, either in buildings, or in the lasting improvement in lands. Smith If we read Smith, the transnational corporations that take the proceeds of domestic accumulation, invest abroad and leave their former workers out in the cold, instead of spreading the capital over the face of our own country to the lasting improvement of the land of the working people who produced the wealth, are hardly to be praised for their callous disregard of working people.

To Smith there is a hierarchy among manufacturing, agriculture, and foreign trade that a nation would do well to respect. Smith said: When the capital of any country is not sufficient for all three purposes, in proportion as a greater share of it is employed in agriculture, the greater will be the quantity of productive labour which it puts into motion within the country; as well as likewise be the value which its employment adds to the annual produce of the land and labour of the society. After agriculture, 46 Reconstructing Political Economy the capital employed in manufactures puts in motion the greatest quantity of productive labour, and adds the greatest value to the annual produce.

That which is employed in the trade of exportation, has the least effect of any of the three. Smith —7 The author of WN, far from advocating more international trade, thought that for the good of the nation its capital should be retained within its borders. Smith thought that left on their own, individuals would in pursuing their own advantage invest at home rather than abroad; that is, self-interest would lead them to do the right thing. His reasons are not that important, although not without merit and insight. In the home trade his capital is never long out of his sight….

They are called to your attention because this line of argument is prelude to the following paragraph, which has within it the famous words concerning the ethereal digits. What is important to the argument is the context in which these words are found. It is enlisted in supporting the argument that we should not allow investment capital to go abroad until the employment needs of the home economy are first met: But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual production of its industry, or rather is precisely the same thing with that exchangeable value.

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As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Smith [Irwin edn. The point to be highlighted is that it is about the support of domestic over foreign investments. The invisible hand leads the individual to carry through the natural order of things. They also tend to use England as a case in Adam Smith: contestation and canonicity 47 point, attributing her high standard of living and global leadership to her presumed commitment to free trade. The story is read differently when we move from the fable to the historical text. The fundamental argument, as in the case of the invisible hand, goes to his sectoral development theory: As the monopoly of the colonial trade has drawn from those other branches a part of the British capital which would otherwise have been employed in them, so it has forced into them many foreign capitals which would never have gone to them, had they not been expelled from the colony trade.

It was not by better meeting the needs of their communities that the butcher, the baker, and the candlestick maker brought about British prosperity. A quarter century before WN, the Abbe Le Blanc, in his Letters on the English and French Nations, wrote: It must be owned that the natural productions of the country do not, at most, amount to a fourth part of her riches; the rest she owes to her colonies, and the industry of her inhabitants who, by the transportation and exchange of the riches of other countries continually augments their own.

Certainly, quantitative measures under alternative 48 Reconstructing Political Economy assumptions yield different figures. To say that England gained advantage through mercantilist restrictions and armed interventions, colonialism and conquest, would be closer to the truth than to say she won world leadership through fair and open competition. The fewer restrictions on trade, the better she would do. It may well be true that global welfare might have been greater if she had followed a free trade policy from the start, but British capital, like the Germans, Japanese, and Koreans subsequently, understood the benefits of mercantile stratagems.

As Hobsbawm summarizes the British case, parliaments and governments Made war and peace for profit, colonies and markets and in order to stamp out commercial competitors…. Hobsbawm It is less useful to examine the matter from a free trade versus protection standpoint than to look at the economic interests arrayed on the two sides of the issue at different points in time. The struggle between commercial traders and manufacturing industrialists was carried out on the basis of political strength and not merely academic debate over the theory of optimal allocation. British producers won protection against Indian textile imports in when they needed it.

By they were strong enough to deprive the East India Company of its monopoly on the Indian trade. To the theorist, international trade is a positive sum game in which both parties benefit or they would not freely exchange goods. To the economic historian, trade between the center and the periphery was not free but the result of colonialism, and the distribution of markets a matter of the comparative strength of naval power, not reciprocal demand in open markets. To the theorist, simultaneous economic expansion is more desirable than one nation attempting to monopolize industrial advancement.

Smith on mercantilism One of our themes is that with the passage of time and shifts in perspective, the texts of the past take on new meaning as they are read with different eyes. That is, were the mercantilists right after all? We have not talked of the economists who have come to be known as the mercantilists. Neither they nor Smith recognize such a name.

They advocated a positive balance of payments to pile up lucre, we are told.

Keynes and Modern Economics

Smith, and most contemporary economists writing on the subject, chose to attack only the less sophisticated and did not address the arguments of these economists. The fact is that mercantilists abhorred the hoarding attributed to them. They understood clearly that money was productive only when transformed into tangible capital. It was precisely for that reason, that hoarded funds were excluded from the mercantilist definition of the effective money supply….

A trade surplus was desired because it was a precondition for obtaining the money necessary to finance growth in investment and employment and also to hold down interest rates. Hudson These economists understood the specie flow mechanism, but also knew that in the real world harmful inflation was unlikely unless an economy was truly at 50 Reconstructing Political Economy full employment. Below this point, more money provided definite benefits. There were A and B economists even then. Steuart explained why in the real world, over the relevant short and medium run, an inflow of gold and silver stimulated growth and was not likely to be inflationary to any harmful extent.

The long-run adjustment remained a theoretical possibility without immediate relevance. These mercantilists thought that under changed conditions free trade may be the better policy choice. He was not an apologist for the rising capitalist class but its severe critic. He believed neither in free market allocation unfettered by moral consideration nor in laissezfaire distribution without the hand of the state to bring greater justice in allocation.

Adam Smith is the father of economics, of both two sides of its nature. B economists who stress social classes, their expenditure patterns, functional sources of income, the distinction between productive and the unproductive labor, power Adam Smith: contestation and canonicity 51 relations between the classes, value as measured by embodied or commanded labor time, profit as a residual, and the importance of institutions, of history, and evolutionary factors in economic outcomes, can point to Adam Smith as their patron saint.

So too can the A economists, who start with the invisible hand optimally allocating resources in a free market, profit as renumeration to risk taking, and an atomistic view of society in which decisions are made by individuals who know what is best for them and need no interference from the state, except that it impartially enforce the rules. Their reading regards Adam Smith as an A-type economist, observing the natural workings of the system which follow laws that can be used to urge that intervention on moral, or any other, grounds in the market economy be prevented.

Smith did not believe that real-world markets approximated perfect competition. Hutcheson had stressed scarcity and its usefulness as an economic construct. In basic respects, Adam Smith was out of step with the modern economists who claim him as their oracle. His endorsement of free markets was qualified in substantial ways and always rooted in an appreciation of the larger ethics of a good society.

We will find that it is possible to build on some of his ideas and come to conclusions very different from the supporters of the status quo who invoke his name. If economics is to aspire to the status of a useful explanatory science, it would do well not only to hold to a more inclusive view of the insights it needs to draw from Adam Smith, but to embrace its origins, diverse levels of analysis, and realms of social understanding. Much the same sort of discussion is necessary when, in the next chapter, the classical tradition he is considered to have founded is discussed.

Our task there is to present the tensions in what is seen as a single school of thought, stressing less familiar themes that will be of subsequent importance. For classical economics, the focus was on the ways in which capitalist production creates a social surplus in the context of the given social relations of production which governed the extraction and accumulation of the surplus by the capitalist class of their time, and on the effects upon the growth of the economy of the manner in 52 Reconstructing Political Economy which the surplus was divided between capitalist accumulation and luxury consumption.

Walsh and Graham The mainstream of the Classical tradition, if it passes through Ricardo and Malthus, draws on Smith the B economist. If one wants to bestow to Say and Senior the laurels of legitimate continuity, as the neoclassical implicitly do, than Smith assumes the shape of an early Chicago economist. In the next chapter we examine the divergence of these paths. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected.

That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That is was adapted to carry a vast and consistent logical superstructure, gave it beauty.

That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social forces behind authority. Keynes Classical political economy of the A type is, among other things, about laws—the law of diminishing returns, the law of population growth, the law of wages, the law of capital accumulation, the law of rent, and the law of markets and other laws.

Such laws are in some tellings operational in the same impersonal way as physical laws. They are declared irrevocable and universal: true regardless of time, place, and existing institutions. As laws they are said to be neither good nor bad in the moral sense. They are then, in one interpretation, how things are; but in another, laws tell us the way things tend to be.

Those who speak of tendency and who privilege contingent elements are B mode economists. Type A classical political economy is closely identified with David Ricardo and type B classical political economy with Thomas Malthus. The third economist of their rank who will be discussed in this chapter is John Stuart Mill. Mill, as much as any economist, is in both the A and B traditions. He is a superb technical economist to whom we owe many contributions of the first 54 Reconstructing Political Economy order, and yet he is also a philosopher, driven to ask questions in ways that undercut much type A thinking.

He charts new ground for the Bs. Malthus and Ricardo set the poles of the debate over the nature of classical economics then political economy. For Ricardo the model is the physics one, for Malthus it is of a contingent social science. Ricardo, Political Economy possesses a regularity and simplicity beyond what exists in nature; as exhibited by Mr. Today we would probably say that Malthus did not see chaos but complexity. He was skeptical of the A type tendency to oversimplify, to generalize at the level of parsimonious abstract modeling rather than to see limits imposed by the specificity of individual instances in their great unavoidable variations.

Ricardo, as we shall see, was prone to passing judgments off as simple facts a particularly compelling instance of the normative economics offered as positive economics problem. Malthus and Ricardo The friendship between Malthus and Ricardo is a wonderful story.

The two men were close, respectful of each other, even in the way they discussed their differences through a dozen years of mutual criticism, as they sought answers mostly in written conversation to common questions. Their correspondence between and the year Ricardo died includes ninety-two known letters from Ricardo to Malthus and 75 by Malthus to Ricardo.

Ricardo built a tight analytic system of the sort A economists prize. His conclusions were drawn deductively from relatively few basic principles. With most of his successors common sense cannot help breaking in—with injury to their logical consistency. Blaug Keynes tempers enthusiasm for Ricardo with a desire for a policy relevant economics. He disassociated himself from the technological optimism prevalent in the opinion molding classes then, as now. But this was a late admission, uncharacteristic, although it had influence on subsequent rejection of the classical model.

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As regards capital, any underutilization implies a smaller social product, therefore a smaller rate of the formation of additional capital, therefore a smaller rate of growth of the social product, etc. Hence, a level of effective demand that falls short of productive capacity during some time is reflected in the short run by an underutilization of capacity and in the long run by forgone opportunities of additional increments of productive capacity to come into existence.

While the labour force will be diminished as a consequence of unemployment caused by effective demand failures, the capital stock will grow at a slower pace than feasible. In both cases the full effects of an insufficient effective demand are concealed. The inattentive observer might actually conclude that in the long run the system can be assumed to operate in conditions of close to full employment of labour and close to full capital utilization, whereas what has actually happened was that effective demand has slowed down the development of the supply side of the economy.

It is a misconception entertained by supply side economists that the supply side can be studied without taking into account aggregate effective demand. In assuming full employment of labour and full capacity utilization, neoclassical models, old and new, follow the example of Solow who in his contribution explicitly set aside problems of effective demand and assumed what he called a 'tight rope view of economic growth'.

This does not mean that there are no such problems, as Solow was to stress time and again and also most recently see Aghion and Durlauf Despite his warnings, neoclassical growth theorists, including Lucas, continued to be concerned almost exclusively with the evolution of potential output and ignored all effective demand failures. Interestingly, the subject index of the Handbook of Economic Growth just referred to has no entry on capacity or capital utilization.

These authors fall victim to the illusion mentioned above.

Assume two identical economies except for the fact that one, due to a better stabilization policy, manages to realize on average, over a succession of booms and slumps, a higher average rate of capacity utilization than the other economy. Then the first economy would grow at eight per cent per year, whereas the second would grow at only seven per cent.

This may seem a trifling matter, and in the short run it surely is, but according to the compound instantaneous interest formula after about 70 years the first economy would be larger than the second one by the amount of their common size at the beginning of our consideration. Hence effective demand matters. Experience also suggests that there is no reason to presume that actual savings can be expected to move sufficiently close around full employment and full capacity savings.

Persistently high rates of unemployment in many countries, both developed and less developed, strongly indicate that the problems of growth and development cannot adequately be dealt with in terms of the full employment assumption. One is, of course, that there is no macro production function which could be derived from micro units. Hence the production part underlying the approach cannot be sustained and lacks micro foundations.

Also the representative agent is without any support from micro theory. The negative implication for traditional theory is close at hand see Kurz and Salvadori In terms of the usual diagram meant to depict the capital market: with the supply curve or correspondence of capital taken as a parallel to the ordinate giving the rate of profits , the demand curve is upward sloping. Equilibrium will be given by the intersection of the two curves; it is unique, but unstable. With perfect competition, conceived of as in neoclassical theory as including the perfect flexibility of the distributive variables, a deviation of the actual from the equilibrium rate of profits would lead to the absurd conclusion that one of the two income categories, wages and profits, would disappear.

This is not what can be observed in the real world. The principle of effective demand Keynes matters, in the long run no less than in the short run. Economics may be a dismal science or discipline, but its present dismal state applies not to the discipline as a whole or to all traditions of economic thought available. It applies to the neoclassical mainstream and especially to NCE. It does not apply to some other lines of economic thought, which, to the detriment of the discipline and also to the detriment of society, have been marginalized in the recent past.

Severe economic crises request the economics profession to reconsider its doctrines, abandon views that can no longer be sustained, return to views that can, or create new ones appropriate to the current situation. As Keynes put it succinctly in the Tract on Monetary Reform: "Economists set themselves too easy, to useless a task if in tempestuous seasons they can only tell US that when the storm is long past the ocean is flat again. Aghion, P.

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Bateman, B. Hirai and C. Besley, T. Blanchard, O. Blinder, A. Clarke, P. Garegnani, P. Gehrke, C. Goethe, J. Henderson, H. Hicks, J. Keynes, J. Reprinted in D. Moggridge ed. VII, London, Macmillan, Kurz, H. Kurz ed. Laidler, D. To be published in Journal of the History of Economic Thought. Lucas, R. Hoover eds. Sargent, "After Keynesian macroeconomics", reprinted in R. Lucas and T. Sargent eds. Magnusson, L. The Visible Hand, London, Routledge, Mazzocchi, R.

Tamborini and H. Trautwein, "The two triangles: what did Wicksell and Keynes know about macroeconomics that modern economists do not consider? Neumann, J. Heywood ed. Reprinted in A. Taub ed. Collected Works, vol. Posner, R. Second thoughts in the middle of a crisis", The New Republic, September 23, b. Prigogine, I. Dopfer ed. Ricardo, D. Edited and introduced by Piero Sraffa with the collaboration of Maurice H.

Sachs, J. Samuelson, P. Shell ed. Skidelsky, R. Sraffa, P. The responsibility for the opinions expressed in it is, of course, entirely with me. The financial tycoon George Soros, who has long been known for his disenchantment with the state of certain parts of modern economics, has recently donated a considerable amount of money in order to finance the development of a "new economics" and has put this project into the hands of economists who are known for their critical attitude towards orthodox economics.

Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. On the different meanings of Say's Law in classical and neoclassical economics, see section 3 below. It would be interesting to know what motivates a growing number of prominent leaders of conventional economics like Posner, Phelps or Sachs putting forth critiques, and even more so just where they are going with these critiques. The future will tell. The widespread myth that the establishment of the modern capitalist market economy went together with a gradual retrenchment of the state and state intervention since the Industrial Revolution is convincingly refuted by the economic historian Lars Magnusson.

Instead of shrinking in size and importance, we can see a more powerful state emerging during the 19th century. It is to be hoped that a sociology of economics will be elaborated before long that succeeds in identifying the external incentives and internal mechanisms that led to the observed agglomeration of power within the profession.

He felt that it would be better to call it just a "discipline". This is perhaps one of the characteristics of the period of transition we face at the beginning of this new century. See also the paper by Mazzocchi et al. As no less an authority than David Ricardo put it in his Principles of "There is no amount of capital [! Notice that the reference is to the employment of capital, not labour, and to production, not employment. The classical authors envisaged Say's Law to apply to capitalistically produced commodities only.