Economic Thought Since Keynes

A History and Dictionary of Major Economists

Michel Beaud, Gilles Dostaler

• Publisher: Routledge
• Year: 2005
• Print ISBN: 9781138160583
• eBook ISBN: 9781134711512
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Economic Thought Since Keynes provides a concise overview of changing economic thought in the latter part of the twentieth century. Part 1 gives an analysis of topics including:
* Keynes and the General Theory,
* the triumph of interventionism,
* the neoclassical synthesis,
* the resurgence of liberalism.
Part 11 gives a concise biography of the 150 most influential economists since Keynes. This invaluable book will be a useful reference tool for anyone teaching or studying economics.

PART I: OUTLINE OF A HISTORY OF ECONOMIC THOUGHT SINCE KEYNES

Prologue

The General Theory of Employment, Interest and Money by John Maynard Keynes was published in 1936, a little over a century and a half after Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations.¹ In his well known book, Smith offers a synthesis of several earlier currents of thought, including French physiocracy, and this new comprehensive theoretical system constitutes the point of departure of classical political economy. Criticizing what he called mercantilism, which, dominating economic thought during the two previous centuries, advocated protectionism as well as an active intervention, as much economic as military, by the newly constituted Nation States, Adam Smith expressed the well known allegory in which the individual is ‘led by an invisible hand to promote an end which was no part of his intention… By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it’.² For Smith, the ‘expences of the sovereign or commonwealth’³ must be limited to those necessitated by defence and justice, and to ‘erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expence to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain’.⁴ Smith's work played an essential role in the development of the economic liberalism, emergent with the triumph of nineteenth-century capitalism, in an England which had become a dominant world power. Codified by David Ricardo⁵ and John Stuart Mill,⁶ political economy became, for the most part, an English science. But it was a French economist, Jean-Baptiste Say, who enunciated in 1803 the law of markets,⁷ according to which, considering the neutrality of money in the economy, supply creates its own demand, and, therefore, there could be no question of having general gluts in a free market economy and thus no chance of the phenomenon which Keynes would call involuntary unemployment. Economic reality, with its regular succession of crises generating simultaneously masses of unsold commodities and misery, contradicted the theory, as was stressed by, among others, Malthus,⁸ Sismondi⁹ and then Marx.¹⁰ Paradoxically, it was by constructing his system from Ricardian political economy that Marx, in his major work, Capital, attempted to give a theoretical foundation to what he believed to be the ineluctable fate of the capitalist societies, namely their transformation into socialist societies.

In the last quarter of the nineteenth century, while Marxism imposed itself on the European workers’ organizations and came to dominate a socialist movement which had, of course, preceded it, political economy underwent an important transformation under what is now called the marginalist revolution. Linked to the names of Jevons,¹¹ Menger¹² and Walras,¹³ it made a clean sweep of the classical, and especially Ricardian, vision of value and distribution. The new theory of prices, primarily based on the principle of decreasing marginal utility, found its development and codification in Walras's system of general equilibrium, which subsequently dominated economic thought. There, society is perceived as a natural mechanism, similar in nature to the solar system or a biological organism, in which the interaction of free agents ensures the best allocation of resources and economic optimum.

Critical in some respects of classical theory, the marginalist revolution improved Smith's parable of the invisible hand, giving it a mathematical formulation. Its upholders remained faithful to Say's law of markets, developing under the form of Walras's law the dichotomy between real data and monetary data. The quantity theory of money, whose history goes back to at least the sixteenth century, links the general level of price to the quantity of money in circulation. The expression of neoclassical theory was soon forged to express continuity, rather than rupture, between the classical vision and that which succeeded it in the twentieth century. The Principles of Political Economy by Alfred Marshall (whose first edition dates back to 1890¹⁴ and which would dominate the teaching of economics, at least in the English-speaking world, for several decades) symbolizes this continuity, illustrated moreover by the phrase in the epigraph on the title page: ‘Natura non facit saltum’. Economic science, which is, according to Marshall, ‘of slow and continuous growth’,¹⁵ constitutes ‘a study of mankind in the ordinary business of life’.¹⁶ Born in 1842, dying in 1924, Alfred Marshall supported his economic vision with the political and ethical conceptions which characterized the Victorian era in England.

Throughout these various developments, reality never stopped contradicting the vision, shared by several classical and neoclassical economists, according to which the free play of markets is enough to ensure the full employment of resources and their optimal allocation. The economic crises succeeded one another during the entire nineteenth century and up to the great war of 1914–18. The workers’ uprisings in the nineteenth century (in particular the events of 1848 and the Paris Commune of 1871), the Russian revolution in 1917, and then the workers’ insurrections experienced by several European capitals as the war drew to a close seemed to confirm, for several, the vision of Marx and his disciples. The crises went on after the war. The stock market euphoria, evident in particular in the United States in the second half of the 1920s, may be compared to a maniacal upsurge, the prelude to a depressive episode which, triggered one day in October 1929, became increasingly severe. The entire world was then ravaged by the Great Depression, which manifested itself in plummeting economic activity, rising unemployment and the broadening of poverty and misery. For some, especially in the labour movement in Europe, the USSR appeared to be a country bearing immense hope: the construction of socialism was under way. For others, nationalism, isolationism or national expansion constituted the principal factors of cohesion and strength. Developing, in particular, the second of these in the form of rearmament, the assertion of national greatness and military expansion, Hitler made National Socialism triumph in Germany.

The world of economists was affected in several ways by this situation. First, the crisis deeply marked the consciences and the lives of those born at the beginning of the century. Numerous were those who, enrolled in courses in literature, law or mathematics, became economists in an attempt to understand the causes of the ills they observed around them, and to look for solutions to contribute towards fighting them. Then, at the beginning of the 1930s, many economists (as did so many intellectuals and artists, especially Jews) left Hitler's Germany and the European countries where his ideas flourished. This migration followed that which occurred from the USSR, after the October revolution; it would be prolonged by that from the countries of Eastern Europe after the Yalta agreements. Western Europe often ensured the first reception, but it was almost always the United States which ultimately received these emigrants. Grants, subsidies and support from diverse institutions helped cope with the more urgent cases; then, very rapidly, positions were offered in universities, research institutes and, from the beginning of the Second World War, in administration and in bodies devoted to military activity. Finally, the crisis accentuated the uneasiness in economic theory by stirring up the debate which brought into opposition those who believed that a market economy had at its disposal the mechanisms necessary to adjust automatically to exogenous shocks and those, descended from very diverse currents of thought, who believed on the contrary that liberal capitalism was suffering from serious illnesses, that it had to be overturned or profoundly transformed, or that, at least, an active and even massive intervention by public authorities was necessary in order to avoid its collapse, and to ease the sufferings of those who were the casualties of growth.

Well before the publication, in 1936, of The General Theory by Keynes, a very broad range of critiques and counter-positions was heard, defying the liberal orthodoxy, which came down, in several cases, to advocating monetary rigour and price flexibility, particularly that of wages, as the only means to boost employment. Often of pragmatic inspiration, with both national and social concerns, these critiques and counter-positions put forward the ideas of large public projects and employment programmes, of anticyclical budgets; one immediately thinks of Schacht in Germany, the proposals of the founders of the Stockholm School¹⁷ which inspired the Swedish Social Democratic politicians, the ideas of the English Fabian socialists, the work of Frisch in Norway on economies depressed by a lack of effective demand, that of Tinbergen in Holland which defined the basis of a full employment policy, of the research in France of the ‘X-crise’ group, and the great debate which arose in the United States during the 1930s.¹⁸

In this context, The General Theory constituted a crucial contribution. Indeed, on the double basis of its author's reputation and of a text of great intellectual ambition, it appeared as both a critique of classical thought, which for Keynes included neoclassical thought, and a new theoretical construction attacking (itself in the name of political liberalism) the liberal economists’ dogmatism, justifying active economic policies and suggesting some essential levers for action. And it is not diminishing its merit to note that, for example, with the package of new policies called the New Deal, President Roosevelt of the United States, elected on 8 November 1932, at the height of the Depression, and assuming office on 4 March 1933, had largely opened the way for those modern economic policies which would, later on, often be labelled Keynesian.¹⁹ In this general movement, the publication of The General Theory played a major role. This is why we devote to it the first chapter of this text.

Notes

1. London, W.Straham and T.Cadell, 1776.

2. An Inquiry into the Nature and Causes of the Wealth of Nations, Homewood, Illinois, Richard D.Irwin, 1963, vol. 2, p. 23.

3. Ibid., p. 215.

4. Ibid., p. 239.

5. On the Principles of Political Economy and Taxation, London, John Murray, 1817.

6. Principles of Political Economy, with Some of their Applications to Social Philosophy, London, John W.Parker, 1848.

7. Traité d’ économic politique, Paris, Deterville, 1803; Engl. transl., Treatise on Political Economy, Philadelphia, Claxton, Remsen and Haggelsinder, 1880.

8. Principles of Political Economy: Considered with a View to Their Practical Application, London, John Murray, 1820.

9. Nouveaux principes d’ économic politique ou De la richesse dans ses rapports avec la population, Paris, Delaunay, 1819.

10. Das Kapital: Kritik der politischen Ökonomie, Hamburg, Otto Meissner, vol. 1, 1867, vol. 2, 1885, vol. 3, 1894; Engl. transl., Capital: A Critique of Political Economy, Chicago, Charles H.Kerr, 1887, 1907, 1909.

11. The Theory of Political Economy, London, Macmillan, 1871.

12. Grundsätze der Volkswirtschaftslehre, Vienna, Wilhelm Braumüller, 1871; Engl. transl., Principles of Economics, Glencoe, Illinois, Free Press, 1950.

13. Éléments d’ économie politique pure ou théorie de la richesse sociale, Lausanne, Imprimerie L.Corbaz, 1874–7; Engl. transl., Elements of Pure Economics or the Theory of Social Wealth, Homewood, Illinois, Richard D.Irwin; London, Allen & Unwin, 1954.

14. Principles of Economics: An Introductory Volume, London, Macmillan; 8th edn, 1920.

15. Ibid., p. v.

16. Ibid., p. 1.

17. See below, Chapter 2.

18. See below, Chapter 3.

19. Keynes, who met President Roosevelt in 1934, had written an ‘Open Letter to the President’, published in the New York Times on 31 December 1933: ‘You have made yourself the trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out. But if you succeed, new and bolder methods will be tried everywhere, and we may date the first chapter of a new economic era from your accession to office’ (The Collected Writings of John Maynard Keynes, edited by Sir Austin Robinson and Donald Moggridge, London, Macmillan and New York, Cambridge University Press, for the Royal Economic Society, vol. XXI, p. 289; hereafter we will refer to this edition of Keynes's works, published in 30 volumes between 1971 and 1989, as JMK, followed by the volume's number).

1: Keynes and The General Theory of Employment, Interest and Money

From ethics to politics

John Maynard Keynes was born in Cambridge on 5 June 1883.¹ His father, John Neville, was an academic there and taught logic and political economy. He was also the author of one of the first books devoted to the methodology of economics, a volume which remains an important reference and a useful synthesis. By trying to define a median path between political economy conceived as a ‘positive, abstract and deductive science’ and his own vision based on an ‘ethical, realistic, and inductive method’,² John Neville Keynes expressed the distinction between positive and normative science, in terms still referred to by Milton Friedman at the beginning of his well known text on ‘The Methodology of Positive Economies’ (Friedman 1953). He was a conservative, adhering, like his friend Alfred Marshall, to the ideals of Victorian England.³ John Maynard, who early revealed exceptional intellectual faculties, soon departed from these ideals, especially under the intellectual influence of the milieux in which he was educated: first Eton (1897–1902) and then Cambridge (1902–6).

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Table of contents

• Cover Page
• Title Page
• Copyright Page
• Introduction
• Part I: Outline of a History of Economic Thought Since Keynes
• Part II: Dictionary of Major Contemporary Economists
• Bibliography