The new old economics

The Economist has a feature this week on “the state of economics” in the wake of the crisis. It’s worth a read as an overview of the PR battle between schools of thought within the mainstream.

The likes of Krugman and deLong are undoubtedly in the ascendancy. As I suggested a few months ago, I think we should see this as the victory of a rational technocratic economics over an ideological conservative economics. While these guys are more pleasant and more fun to read than the so-called ‘freshwater’ economists, it is not an especially ‘progressive’ or ‘left’ economics.

The line of both Krugman and William Buiter that the last 30 years of economics have been a dead end dates the wrong turn to the 1970s. Their cut-off point would, I think, come between Friedman and Lucas. The mistake was ‘rational expectations’ and ‘new classical economics’, which basically completely reject Keynes – uncertainty, historical time instead of general equilibrium, and the non-neutrality of money – and return to pre-Keynesian orthodoxy on a more mathematically sophisticated basis.

Friedman’s version of the quantity theory was also a mistake, though that is hardly news. His politics may be gauche. But the Friedman of the ‘natural rate of unemployment’ and the ‘expectations-adjusted Phillips curve’ was not at all a mistake for the technocrats. In fact he represents the apogee of the technocratic neoclassical-Keynesian synthesis rather than a rejection of it. DeLong in particular has been quite explicit about this, arguing that “Friedman completed Keynes” . (For more detail see his “The Triumph of Monetarism?” in the Journal of Economic Perspectives, Winter, 2000.)

The shifting of mainstream economics and policy back towards neoclassical-Keynesianism well predates the crisis. In fact, as I’ve argued before, it never really stopped dominating macropolicy-oriented economics, as opposed to academic economics or microeconomic policy. You can see the basic argument that macroeconomics had it basically right around 1971 or so, for example, in this 1999 paper from the Reserve Bank of Australia:

By the 1990s, however, the intellectual framework for analysing inflation had come full circle. The framework of the 1990s had much in common with the  one enunciated in the 1971 ‘Inflation’ paper. The intervening years had led to some refinement of the analysis, but the expectations-augmented Phillips curve had returned and once again was at centre-stage. [p. 40]

What we’re seeing now is an opportunistic reconsolidation of its academic and public reputation against ‘new classical’ holdouts.

The rediscovery of the specifically financial side of Keynes may be genuinely new. That The Economist quotes Paul Davidson  and calls Minsky a “neglected prophet”, is an interesting sign. Both are post-Keynesians, well out of the mainstream. Post-Keynesian economics, incidentally, has very little to be embarrassed about by the crisis, since it has analysed finance in a realistic way all along.

(The term ‘post-Keynesian’, confusingly, refers to Keynes purists who set themselves against the ‘bastard Keynesianism’ of the post-war period, also incorporating a great deal of Marxian influence, thanks to Robinson, Kalecki and Sraffa. Davidson’s relatively conservative as these guys go, while Minsky comes out of the Marx-inflected side, and I hear they didn’t get on well after Minsky gave Davidson’s magnum opus a critical review.)

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1.5 Conclusion

Alright, having so much trouble fitting all my material on inflation theory into a couple of thousand words, so I’ve decided to make it a whole new chapter. The upside is that this chapter is finished! The downside is that all the chapter references above are now wrong! Here’s the summary of the chapter as a whole. You may notice some subtle differences of emphasis from the body of the chapter, in point #4 in particular; that’s partly thanks to the helpful discussions in the comments here. Eventually I’ll rework the earlier sections a little, correspondingly. But in general, I’m pretty happy with this chapter. Hopefully the next one will come faster.

A draft thesis section. This is a draft of an unfinished document, please don’t quote without getting in touch first. Quoting in blogs is fine.

Previous section / Next section

In this chapter I have set out my approach to understanding economic policy and its historical development within the broader social structure of capitalism. To summarise:

1. Economic policy exists at the boundary between two relatively independent systems, the state and the economy. These two systems are only relatively independent, because each is necessary to the other’s reproduction, and they are not even institutionally separate, in that, for example, the economic system depends everywhere on a system of laws and their enforcement, while state activities involve the use of money and wage-labour.
2. The capitalist state has historically evolved certain structures and processes which deal with dysfunctions in the economic system, and thus modified the way in which the two structures reproduce themselves as a whole. Two fields in which state involvement has been especially important are the reproduction of labour-power and the management of money. This evolution can be understood in more-or-less functionalist terms, though it is of course driven by conscious political activity – within legislative, executive and judicial structures – focused on solving specific ‘problems’, which dysfunctions appear as politically. This is definitely not to say the process is driven by a singular state subject.
3. However, in the course of the Great Depression and the Second World War, something like a unified strategic actor in the field of economic policy emerged (though the unity is of course contingent and can break down). It was unified partly on the basis of new macroeconomic theory which posited it as such an actor, calling for a rational and combined use of certain state structures which had already developed independently within the economic system for other reasons. It involved especially the use of state budgets (fiscal policy), central banking (monetary policy) and arbitration system (wages policy) as instruments.
4. The work of Jan Tinbergen on economic policy illustrates well the ‘point of view’ from the ‘subjectivity’ of economic policy. The economic system appears as a problem to be solved – in fact, even abstractly represented as a system of equations. However, the contradictions of the system – especially those arising from the conflicting aims of classes and other groups with the social power to pursue them – mean that it may lack a solution. Contradictions can reappear at a policy level, with instruments torn in different directions. This can motivate policy attempts to restructure its own apparatus and to reshape the economic system itself to attack the social power bases of the groups in pursuit of functionality. Meanwhile, groups themselves are actively seeking to improve their own strategic position. This may include attempts to use political power to restrain or direct policy itself. However, the fact that policy has come to be held responsible for the functionality of the system as a whole places powerful selective pressures on political possibilities.
5. My use of this conception of economic policy to explain the development of counter-inflation policy in Australia between 1945 and 1985 is in sharp contrast to the standard neoclassical ‘new macroeconomic consensus’s’ narrative of its own emergence, as essentially the triumph of correct views over error. Here I briefly pointed to some problems in the standard narrative, and signalled some aspects of my own story, which will be expanded upon in the coming chapters.

Laughing last

In a review of Martin Wolf’s Fixing Global Finance Alex Callinicos takes a detour to gloat a little at Leo Panitch, who he had debated on political economy and imperialism just before this whole crisis thing broke out.

But plotting the course of a crisis that has undergone such dramatic twists and turns is a hazardous business even for those not intellectually imprisoned in the theoretical assumptions of neoclassical economics. For example, Leo Panitch and Martijn Konings, introducing a valuable collection of essays written from a broadly Marxist perspective about finance and American imperialism and published last autumn, rather unwisely expressed “some scepticism” about “strong claims concerning the disastrous outcome of the current liquidity crunch for the global system of finance and America’s position in it”. They add, “The main upshot of the current situation is that the American state finds itself with a peculiar and unanticipated problem of imperial management”. I think it’s fair to say the problem lies a bit deeper than one of “imperial management”.

It seems Panitch and Konings might have felt a little remorse of their own, since their (edited) book, American Empire and the Political Economy of Global Finance, published last year, is already getting a second edition.

But it’s unfortunate if Callinicos and others are taking the crisis as a vindication of the idea they were defending through those debates earlier in the decade, that capitalism’s still suffering from the aftereffects of the 1970s crisis and an associated decline in the profit rate. Panitch, with collaborators Sam Gindin and Martijn Konings, has had the stronger argument throughout. It’s never been simply that there would be no crisis, but only that Marxists should think twice before leaping to the ‘imminent crisis’ conclusion, that we don’t have special economic forecasting powers, and that always harping on imminent crisis and/or continual stagnation distracts from other criticisms and strategies, not to mention the continuing dynamism of capitalism.

Here’s a piece from 2002 from Panitch and Gindin on the topic, which I’ve posted before. Calling into question Monthly Review‘s familiar diagnosis of everlasting stagnation and prognosis of imminent financial crisis, it still stands up pretty well even in the midst of an actual financial crisis. (Did Monthly Review predict it? How ‘imminent’ is ‘imminent’?)

To its credit, the ISJ has followed a policy of seeking out and publishing pieces critical of its own editors’ lines, which is how the Panitch-Callinicos debate started, after all. Another critical highlight, which addresses pretty well this idea of permanent stagnation since the 1970s, is this piece from last year by the excellent Jim Kincaid.