Beyond the perfect and imperfect to the real

“There are…, I should admit, forces which one might fairly well call “automatic” which operate under any normal monetary system in the direction of restoring a long-period equilibrium between saving and investment. The point upon which I cast doubt – though the contrary is generally believed – is whether these “automatic forces” will…tend to bring about not only an equilibrium between saving and investment but also an optimum level of production.”

John Maynard Keynes

This brief quote from the great man sums up the argument put forth in his magnum opus, The General Theory, that a capitalist economy does not have an automatic tendency to achieve full employment. It may possess other “automatic forces”, but these will not do the trick.

Keynes’ famous work of 1936 tried to explain to his fellow economists the origins of the Great Depression of that decade and provide a rationale for government policy to reduce the mass unemployment that had afflicted the rich world.

Today’s so-called New Keynesians use a theory which relies on the presence of ‘market imperfections’ to explain unemployment, and which is a long way from the original ideas of Keynes himself.

While Keynes’ ideas gave birth to the discipline of macroeconomics (a theory about the operation of the economy as a whole), the New Keynesians stress the importance of ‘microfoundations’ and methodological individualism as the basis for their analysis. New Keynesian economics neglects the macro or systemic aspect of Keynes’ theory except as the outcome of the behaviour of isolated individuals.

Here is a quote from two Cambridge economists who draw on the original ideas of Keynes and reject the relevance of imperfections imposed on an otherwise idealised perfect economy:

“On the one hand, there are those authors who argue that, in the long run, the forces of demand and supply tend to push the economic system toward a full-employment level of activity (or towards a natural rate of unemployment). These authors we shall refer to as the “market-mechanism group.” On the other hand, there are those who, while accepting the characterization of a market mechanism that operates under the influence of the forces of demand and supply, maintain that this mechanism is inhibited (or perhaps even totally obstructed) by the presence of a variety of market imperfections, both social and institutional, such as sticky wages and prices, sticky interest rates, and the disruptive impact of uncertainty and disappointed expectations. This latter group, which we refer to as the “imperfectionists,” encompasses a whole variety of writers who often have little in common other than the fact that their support for employment policies based on the direct manipulation of the level of effective demand derives from the characterization of unemployment as arising from an obstructed market mechanism.

The major theme here is that the position of the imperfectionists is, in the final analysis, untenable. For, not only is the determining role of imperfections more difficult to sustain the longer the time period considered; but also that the argument that the operation of the market mechanism is inhibited by, say, the role of trade unions or the influence of uncertainty, involves a priori acceptance of the underlying theoretical model of the operation of the market mechanism which is provided by the market mechanism group. It all becomes a matter of degree.”

John Eatwell and Murray Milgate (2011), The Fall and Rise of Keynesian Economics, p.251-2

Finally, and along similar lines, here is Anwar Shaikh from his own magnum opus Capitalism, with a critique of both mainstream neoclassical economics and heterodox (non-mainstream) strands as a basis for constructing what he calls a ‘real’ economics of the capitalist economy, influenced by Marx and the classical economists as well as Keynes; in this spirit his own theories are “constantly confronted with empirical evidence” and contrasted with neoclassical and heterodox thinking.

In some ways this is arguing over semantics, but it is a clever piece of rhetoric which attempts to provide a clean break with current widely accepted but flawed theories, and establish a basis for developing his own corpus of ideas:

“Neoclassical economics investigates the workings of a deliberately idealized version of capitalism, from whose vantage point it seeks to characterize the world. Heterodox economics seizes on the distance between this vision of perfection and the real world. Both sides attempt to bridge the resulting gaps by ladling various “imperfections” into the original mix. Both therefore remain forever off-balance, one foot in the ideal and the other in the real. The goal…is to develop a theoretical structure that is appropriate from the very start to the actual operation of existing developed capitalist countries. Its object of investigation is neither the perfect nor the imperfect but rather the real.”

Anwar Shaikh (2016), Capitalism: Competition, Conflict, Crises, p.4-5

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