LECTURE 8: A HISTORY OF ECONOMIC THOUGHT FROM KEYNES TO THE PRESENT

Why study the history of economic thought?

Political economy or economics as a social science

The cumulative view of evolution: a progressive movement towards a more perfect of understanding

The competitive view: different conceptual foundations about similar economic realities

The contextual view: economic theories determined by the historical, national and international background

A controversial branch of knowledge A specific pattern in economics : a plurality

of divergent schools or authors in different periods

Accompanied by the dominance of a given current of thought : mainstream, or orthodoxy

And the presence of dissidents, heretics or heterodoxy

Example (schematized) : 19th century : dominance of the English

classical school, heterodoxy : Marx 20th century: dominance of the neoclassical

school, heterodoxy : Veblen, Keynes

Cycles in intellectual influence Alternating periods of influence and

disregard, or oblivion and rediscovery Malthus and Keynes Schumpeter : wilderness years, and

comeback in the 1980s Hayek : influence 1930s-1940s,

marginalization 1950s-1970s, comeback in the 1980s-1990s

Keynes : authority in the 1950s-1960s, dismissal in the 1970s-1990s; comeback through the present world economic crisis?

MERCANTILISM

CLASSICAL SCHOOL

MARX

MARGINALIST REVOLUTION

A short sketch of economists and schools before Keynes

The « mercantile system »

Mercantilism, 16th-18th centuries The first dominant school, in a period of

capitalist emergence The State or the sovereign should

accumulate wealth, especially money (precious metals)

The balance of trade should be kept positive The state should use legislation and

protective policy to augment the country’s wealth

The classical school

Period of the extension of the industrial revolution

Adam Smith, The Wealth of Nations, 1776

David Ricardo, On the principles of political economy and taxation, 1817

John Stuart Mill, Principles of political economy, 1848

Smith (1723-1790)

David Ricardo (1772-1823)

John Stuart Mill (1806-1873)

Classical political economy

The problem of wealth production and distribution

Labour-theory of value Three great classes based on property :

workers, capitalists, land owners Three types of income : wages, profit, rent The accumulation of capital as the main

source of increased wealth The problem of long-term growth :

avoiding the stationary state

Economic liberalism

A criticism of the « mercantile system » Opposition to the Corn laws limiting imports of

corn in England, and to the Poor laws protecting the indigent people

A defense of the self-regulating character of the system of exchange or market economy

An apology of free trade, as benefiting to all partners of exchange (Ricardo’s comparative costs argument)

A strict limitation of the role of the state in the economy

The invisible hand : a providential process (Smith, 1776)

Individual self-interest as the main motivation: « It is not from the benevolence of the butcher, the

brewer, or the baker, that we expect our dinner, but from their regard to their own interest. »

About the economic agent: « By preferring the support of domestic to that of

foreign industry, he intends only his own security; and by directing that 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. »

A criticism of state intervention: «  Nor is it always the worse for the society that it was

no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. » (Smith, 1776)

Marx and the critique of political economy A follower and a critic of the classical

school. Das Kapital (1867) The role of « critique »: unveiling essential

relations hidden beneath superficial manifestations, and explaining the cause of distorted appearances

Capitalism as a combination of commodity production and wage-labour system

Two principal contradictions : labour vs capital, and competition of capitals

A system based on perpetual change « The bourgeoisie cannot exist without

constantly revolutionizing the instruments of production, and thereby the relations of production, and with them the whole relations of society. »

« Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. All fixed, fast frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. » (Manifesto, 1848)

Marx (1818-1883)

Capital as a moving contradiction Value and surplus value: a theory of

exploitation Surplus value produced by labour as the

single source of non-wage incomes (profit, interest, rent)

Falling rate of profit : the main tendency and counter-tendencies

Economic crises as the expression and the temporary solution of internal contradictions of the system

The capitalist mode of production condemned to eventually disappear

The marginalist revolution

A major shift in economic theory (1870s-1890s) Labour theory of value is superseded by

marginal utility theory of value (objective approach turns subjective)

Class analysis is discarded, the individual becomes the basic reference

The concept of « equilibrium » is central Partial equilibrium (Marshall) General equilibrium (Walras)

A theory of exchange (the « market ») An approach based on « efficiency », the

optimum concept (Pareto)

Léon Walras (1834-1910)

The market vision of the world

« The whole world may be looked upon as a vast general market made up of diverse special markets » (Walras, 1874)

An early formulation of the notion of a « market economy », or a « markets economy »

Alfred Marshall (1842-1924)

Shift from classical to neoclassical school « Economics » supersedes political economy « Neoclassical » : a critical term introduced by

Veblen (1900) to stress the disputable continuities with the classics, i.e. a teleological approach and an implicit normative stance

… but a questionable label, taking into account the important breaks with the classics

… a term that will eventually be positively adopted by « neoclassical » economists themselves in the second half of the 20th century (Hicks, Samuelson)

Marshallian economics at the beginning of the 20th century Principles of economics (1890, 8 editions) The « partial equilibrium » method: isolating

an agent or industry, analysing its behaviour under the ceteris paribus clause, and allowing gradually fixed elements of the environment to change

Supply and demand curves : the marshallian cross, determination of equilibrium price and quantity

Increasing or decreasing returns to scale A defense of free entreprise, but admission

of a limited state intervention for promoting social welfare

Marshallian cross

Keynesianism

Due to John Meynard Keynes He explained the economic crisis in the

USA from 1929 He concluded that the crisis was caused

due to demand and not supply He generally placed more emphasis on

the demand side