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Alternative disciplines of economics have long argued against the mainstream that the path to fully functioning markets does not require full employment, writes associate professor Graham White.

IT IS OFTEN said that with ten different economists one gets at least ten different opinions. There is more than a grain of truth in this. Economics is not an “exact science”.

But there is another type of difference within the economic profession, mainly at the academic level. And it has to do with the “fundamental” building blocks – the foundations on which complex models are ultimately built and policy prescriptions derived.

These are differences that many within the academia are vaguely aware at best, especially among younger academics. Notably, perhaps, because the study of the history of economic thought is generally seen as a strange and relatively unimportant indulgence to a few, although it is tolerated at least for now. Unfortunately, it appears that tolerance is waning.

Regrettable, because the study of the history of economic thought reveals that the progress of the economy is not progress in continuity, where the work of this generation is constant and where the progressive enlightenment will influence the views of the next generation. Rather, it’s about big twists and turns – some bad corners – and a dominant tension, at times, seemingly capable of reinventing the wheel. Thus, for some, the use of the term “science” applied to economics pushes the proverbial upwards.

The deeper differences of views on the building blocks could be better illustrated by sharing some thoughts mainly in the field of macroeconomics and in particular on one of its standard topics: unemployment.

Students usually approach this topic starting with the seemingly obvious question: Why is unemployment occurring? It seems fair enough. (Unemployment here refers to an environment where there is not enough work for those who wish to work at the current real wage.) But, another place to start might be to ask: why should we wait for full employment (the absence of defined above), at least in time?

At one level, this difference in starting points does not appear here or there. Yet for anyone with the history of macroeconomic thought in mind, the difference would be striking. It is the belief that, left on its own, a competitive market economy operating in a flexible manner would pave the way for full employment that leads one to start by asking why there should be unemployment. And the answer – given by traditional theory – would be in terms of deviations from this flexibly functioning “benchmark” competitive case.

A multitude of factors (imperfections and rigidities) – for example, minimum wage laws, unfair dismissal laws and minimum unemployment benefits – could be a drag on employment, bypassing the path to this benchmark. and therefore the road to full employment. And these “keys” should not be limited to the so-called labor market.

They must not be incompatible with the optimization of individuals either, that is to say individuals choosing among the alternative actions those which maximize their satisfaction.

This general approach to unemployment is the story told by economists for a long time, since the end of the 19th century in fact. Involuntary unemployment was ultimately seen as a reflection of one or more possible imperfections. To update it further, the buzzword of the “zero lower bound” on monetary policy can be seen as a more recent version of a flawed explanation – its pedigree, however, is nearly 100 years old.

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This particular rigidity – a constraint on the ability of central banks to adjust real interest rates to levels consistent with full employment – has seen a resurgence in the explanations for stagnant demand in advanced economies after the financial crisis. global (GFC) and before the pandemic, even justifying fiscal expansion.

However, the alternative starting point – why expect full employment? – could be justified if one takes a fundamentally different perspective on how, in its most flexible form, a competitive market economy might function.

This alternative (call it heterodox, for lack of a better term) would say that the benchmark competitive model economists have in mind – sometimes implicit at best – falls short.

Heterodox critics have argued for many years that mainstream theory is unable to tell us how a real economy operating at its most flexible level could, in real time, chart a course approaching the ideal benchmark of mainstream theory. The heterodox alternatives, buried in the underground world of economics (to borrow an expression from the English economist Keynes), start from a radically different view of how markets would work optimally individually and in combination.

These alternatives have many inspirations. One is the work of the 20th century Italian economist Piero Sraffa and the 60 years of research that followed was inspired by it. There is also the work of Keynes in the 1930s and the Polish economist Michał Kalecki between the 1930s and 1960s.

Then there is the Anglo-Italian current launched by economists Joan Robinson, Nicholas Kaldor, Luigi Pasinetti and Pierangelo Garegnani in the 1950s and 1960s. Their work has also spawned a research program that continues to this day.

There are certainly differences within this vast stream of research. But a common denominator is that the development of fundamental building blocks in economics took a wrong turn a long time ago, about, the 1870s.

More importantly, the heterodox alternative fails to combine fully flexible markets and properly informed economic actors with any necessary path to full employment. Neither is such a connection found in the works of the most famous of the classical economists, Adam Smith, David Ricardo and the critic of political economy Karl Marx.

Heterodox economists have long argued that the nexus between fully functioning markets and full employment is a purely “modern” invention – and one built on shaky foundations. Serious criticism of these foundations came to a head in the 1960s.

From a heterodox perspective, unemployment is not an example of “market failure”. Rather, it is a normal (although obviously reprehensible) characteristic of a fully functioning competitive capitalist economy.

This is the central idea that Keynes tried (unsuccessfully) to convince the profession in the 1930s. Garegnani had pointed out that criticism of Orthodox foundations in the 1960s allowed Keynes’ insight to stand on ground. more solid.

From this point of view, there is no inherent tendency for the quantity of jobs to adapt to the available supply of workers, regardless of the proper functioning of the markets. Any adaptation goes rather in the opposite direction, because the supply of labor (that is to say people looking for a job) adapts to the volume of employment available. This type of adjustment, as we know, can manifest itself in the behavior of the participation rate.

What’s also remarkable is how much this heterodox view changes so many other things (as Keynes also pointed out a long time ago). Money matters!

The existence of money will change the very nature of the results in the real economy produced by a flexible market economy in the short and long term. A result not easy to achieve in conventional economics as its history shows. And, at the same time, monetary and fiscal policy can have permanent effects on the growth path of the economy.

The recognition of this would represent a radical change in conventional thinking. In addition, there is no longer a need to associate perfectly functioning markets with maximizing “well-being” once all hard and fast associations of imperfect functioning and unemployment are abandoned.

To many academic economists, these claims sound bizarre. Yet this may be where a serious lack of appreciation for the history of his discipline really comes into play.

And a heterodox alternative does not only concern macroeconomics.

It would likely follow a drastically different path than the dominant viewpoint in how it explains things like relative prices (the price of one good or service in relation to another) and the distribution of income among different groups. of society – the more traditional, let alone fashionable, parts of the economy nowadays.

In doing so, he may well avoid what is sometimes called “methodological individualism” which has long been the basis of the economist’s approach to just about everything, including the idea that economics is. coextensive with the theory of human choice.

Arguably, the latter has been a driving force in the quest for the profession for many years to coexist (or “colonize”, depending on your point of view) other social sciences.

For some heterodox critics, requiring that every economic proposition be formulated in the language of optimization of individual agents is neither necessary nor particularly fruitful in explaining relative prices, the functioning of markets or the analysis of macro phenomena. To be fair, a few orthodox economists have expressed this concern themselves over the years.

There are alternatives. But progress in the discipline of economics demands more. At the very least, it requires opening some minds to a hitherto intolerant mainstream.

Graham White is Associate Professor in the School of Economics at the University of Sydney. He teaches macroeconomics and the history of economic thought. You can follow Graham on Twitter @heterodox_econs.

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