By Adam Strømme
Editor-in-Chief, Economic & International Relations Student 

As a student of the history of economic thought, i’m almost more comfortable discussing the various points of conflict between various economic theories than the theories themselves. Economics, like no other discipline, has been defined by debate and controversy. And the debates which have raged are far from topical, they concern the very assumptions—the very rules— of how the modern economy works and how we ought best go about understanding it. For this reason, learning the points of contention that make up the discipline, and the more radical conclusions which follow them, is at least as instructive as memorizing the contents of the models themselves.

But entering an undergraduate economics course, you wouldn’t know that.

Instead, as I have discussed previously, what most students are presented with when they enter the classroom has changed very little in the last 80 years. Despite the multiplicity of economic theories, one would read nothing in the standard economics textbooks on the work of Austrian, Marxist, behavioral school– really, any school of economics other than the Neoclassical model that dominates today. This is critical, because without a grounding in the history of economic thought, students today are robbed of much of their ability to engage critically with the economic models they are being taught. They can regurgitate equations, but without being able to grapple with what the equations assume and really mean beyond playing with the algebra.

Education without critical thinking is dogma, not science.

This critical engagement with the foundations of economics has been enormously productive. Indeed, its only with a cruel sense of irony that the very ossified model undergraduates are taught today draws its roots from that spirit of critique which proliferated around 80 years ago. But instead of focusing upon their models, what is really instructive is to see how two thinkers, John Maynard Keynes and Michał Kalecki, greatly expanded our understanding of the economic world in precisely this spirit.

What a review of these two influential economists suggests is that with a more nuanced approach to economics came a distinctly heterodox series of conclusions, each of which would be hard pressed to find expression in the generalities which form the Neoclassical Synthesis. It is no coincidence that with the solidification of neoclassical orthodoxy the dynamite-like conclusions of many prominent thinkers were papered over.

This might come as a surprise to some. The idea of a radical economist is almost an oxymoron. Indeed, there are few things economists are better known for than deflating the aspirations or diverting the criticisms of contemporary reformers, ostensibly in a monotonous tenor, and usually with a graph or two thrown in for good measure. In the public mind, economists are like adults, scolding the child-like declarations of politicians Left and Right and setting the agenda for what is realistic. Economists remain, in the public eye, “Very Serious People”.

The idea of a radical economist is almost an oxymoron

But as we will see, the definition of what is realistically possible is very different from what is familiar. In making this conflation, students of economics— too often robbed of their discipline’s own history and thus the necessary context to come to their own conclusions— buy into this very premise which their teachers implicitly assume of them. This unspoken (or perhaps even more troubling, unknown) arrangement within the discipline encourages students to regard an affirmation of their textbooks as being an affirmation of what is realistic, even desirable. Thus the Neoclassical Synthesis, in regurgitating many of the same gross oversimplifications of the Classical school, of which perfect competition and market clearing, full employment and no dynamic money or credit market to speak of, becomes the norm.

In “The End of Laissez-Faire”, Keynes pointed to this exact problem, writing:

“The guarded and undogmatic attitude of the best economists has not prevailed against the general opinion that an individualistic laissez-faire is both what they ought to teach and what in fact they do teach… the beauty and the simplicity of such a theory [is] so great that it is easy to forget that it follows not from the actual facts, but from an incomplete hypothesis introduced for the sake of simplicity… they reserve, that is to say, for a later stage their analysis of the actual facts. Moreover, many of those who recognize that the simplified hypothesis does not accurately correspond to fact concluded nevertheless that it does represent what is natural and therefore ideal. They regard the simplified hypothesis as health, and the further complications as disease.

Keynesianism, although hardly regarded as radical nowadays, was in fact a frontal attack on this simplified hypothesis. It represented a full throated demand that the ‘complications’ which reality sought to inconvenience economics with be addressed immediately, with the ominous spectre of a society-wide meltdown from the Great Depression waiting in the wings. Intellectually, this raised the bar on both supporters and detractors of Keynes’ arguments, and started a discussion which continues to unfold (albeit in a heavily skewed form) today.

Yet despite this, economists dared to dream. This was the era of the New Deal, the Beveridge report, and the policies which produced the longest sustained period of global growth alongside some of the lowest rates of poverty in modern history. It is not without justice that this era, and these thinkers, helped produce the so-called “Golden Age of Capitalism”. This was the age when an economist could declare the eradication of things like ‘squalor’, ‘ignorance’, ‘want’, ‘idleness’, and ‘disease’ as a public priority and receive the ear of the public, rather than be a mere mouthpiece of the status quo, blithely waving a hand at regulation or State governance as the ‘complication’ which prevents prosperity from arriving like some sort of deus ex machina.

It is time we revive the insights of this age.

Keynes: The Composition Fallacy and the State

Keynes is today regarded as the father of modern macroeconomics. In economics courses, his viewpoint has largely been distilled into a problem and a remedy. The problem was persistent industrial depression, which he explained as the result of self-fulfilling expectations amongst investors lowering the equilibrium level of output. Because consumption was reliant upon investment and not the other way around, the argument went, the often irrational swings in the business confidence of investors, which he pejoratively termed “animal spirits”, had the potential to translate market pessimism into stagnant production. His remedy, which made him a household name, called for government spending and a more activist fiscal policy to buoy investment and set a floor on output, thus ensuring the economy could avoid the excessive swings which had sent the global economy careening into crisis.

This part of the story is familiar to most, at least in its broad outline. What is less familiar, and far more interesting, is that Keynes understood he had to slay a veritable dragon in the halls of academia in order to translate this common sense diagnosis into policy. Amongst economists in the Classical school, the sentiment towards government involvement in the economy was almost wholly negative, as faith in market forces revolved around the circular logic by which all necessary investments were profitable investments and all profitable investments would be taken up by the private sector.

Confronted with this circular logic, Keynes’ judgement was both damning and unequivocal:

“Let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded. It is not true that individuals possess a prescriptive ‘natural liberty’ in their economic activities. There is no ‘compact’ conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately.”

Keynes’ angle, which is insufficiently appreciated in its conscious departure from orthodoxy, broke this circular reasoning decisively. Stressing the self-fulfilling nature of expectations and uncertainty—  Keynes was actually a statistician, and not an economist by trade—  Keynes showed that the faith of the Classical school in market forces rested on a fallacy of composition. Specifically, that the individually advantageous level of investment amongst private investors was the same as the social optimum.

This he deemed wrong for two reasons: the first individual and the second social. The individual reason for this rested on the hesitance individuals have in committing their savings towards investment, or, as Keynes wrote quite explicitly in the General Theory that “the weakness of the inducement to invest has been at all times the key to the economic problem.” And to those who charged Keynesian spending programs would replace chronic underinvestment with waste and profligacy, Keynes met them head on, responding that overinvestment strictly defined as a state where no new investment could expect “to earn in the course of its lifetime more than its replacement cost” was exceedingly rare, and in any case the result of “misdirected” investment, and not an oversupply of investment as such.

The social manifestation of this problem was persistent unemployment. During the Great Depression, the disconnect between private and public interests made this abundantly clear, but unemployment figures upwards of 25 percent were by no means necessary to prove his conviction that a capitalism dependent upon private investment would fail to result in full employment. “Except during the war” he wrote in 1936, “I doubt if we have any recent experience of a boom so strong that it led to full employment.” Thus, it was the natural role of the State to take a much larger role than was traditionally deemed “efficient”, in particular because the alleged efficiency was a mirage produced by the composition fallacy. In order to realize the potential of the private sector, capitalism needed a dynamic public sector.

Ultimately, Keynes’ dream was thoroughly utilitarian. Classical school economists were wrong in presuming the public and private interests coincided, and thus the State had a vital role to play. Marxists and other Left-wing intellectuals, in turn, were rash in seeing the validity of replacing Capitalism as being based upon its defects rather than in spite of its virtues. In the end, the Welfare State can be seen as a moderate compromise with Keynes’ vision, which was best encapsulated in a hopeful essay he penned in the very depths of the Depression: “We do not wish, therefore, to be at the mercy of world forces working out, or trying to work out, some uniform equilibrium according to the ideal principles, if they can be called such, of laissez-faire capitalism… we wish… to be our own masters, and to be as free as we can make ourselves from the interferences of the outside world.”

Michał Kalecki: Capitalism and Democracy

Perhaps one of the most interesting members of the early Cambridge Keynesian school was also one of the most persistently neglected. Michał Kalecki was a brilliant and largely self-educated Polish-born emigre credited with formulating many of the same elements of Keynes’ General Theory around the same time. Himself a Jew who narrowly escaped persecution at the hands of the Nazis, Kalecki was intimately concerned with the relationship between political and economic power. As a result, and despite the similarities between Keynes and his own work, Kalecki was more pessimistic about the prospects of using the State in order to trim the edges on the business cycle.

His reason for concern was at once historical, and political. Having witnessed the collapse of the global economy, Kalecki shared in the conviction of many Left-wing commentators that the rise of Fascism was the authoritarian response to the militant unionism brought on by the Great Depression which threatened capitalism as a whole. But absent immanent revolution, the aura of paranoia surrounding government involvement in the economy required a more nuanced explanation. His analysis of this paranoia was laid out in the midst of the Second World War, in what has been called “one of the most prescient economic papers ever published”: “The Political Aspects of Full Employment.”

Kalecki was intimately concerned with the relationship between political and economic power

Kalecki’s question was very simple: if high levels of government spending could be sustainably financed in order to level out the business cycle, boost the profits of the private sector, increase output, and ultimately deliver full employment, then why did this seemingly win-win policy receive such stiff opposition from the business community? After discussing how government investment could be a source of competition, Kalecki moves swiftly into the heart of the matter: full employment is dangerous because it would erode of the reliance of workers upon any one employer, public or private.

In his own wording: “under a regime of permanent full employment, the ‘sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow.” In other words, the right of an employer to set the conditions of employment would collapse, because for much of the workforce involuntary unemployment would become impossible. Workers would no longer accept the terms of employment unless they independently thought they were agreeable. They would be, to repeat Keynes’ sentiment, their “own masters.”

However agreeable this might appear to be for most of the population, it is incontestable that it would be disastrous for the powers that be. But in the face of the Great Depression, with calls everywhere demanding full employment, if full employment wasn’t delivered, the heads of the political elite would roll. The time was frantic, and the only solution acceptable would be one that managed to marry the demands for full employment with the entrenched political and economic elite.

Workers would no longer accept the terms of employment unless they independently thought they were agreeable. They would be, to repeat Keynes’ sentiment, their “own masters.”

Enter Fascism.

Fascism, to Kalecki, could not be written off merely as an aberration of the defeated powers. Rather, it was the natural product of the social upheaval witnessed across Europe at the close of the First World War. Faced with militant unionism and widespread industrial disarray, Fascism afforded a sort of fail-safe for the business community while at the same time serving to “remove capitalist objections to full employment.” There is no objection because “the state machinery is under the direct control of a partnership of big business with fascism” and crushes absolutely any resistance to “discipline in the factories”. In the course of its life cycle, “The fascist system starts from the overcoming of unemployment, develops into an armament economy of scarcity, and ends inevitably in war.” In its final act, business is made safe from the pressure of popular government, because popular government is eradicated. As Kalecki concluded dryly, “In a democracy, one does not know what the next government will be like. Under fascism there is no next government.”

Kalecki’s conclusion is stark: full employment in the sense envisioned by Keynes would be met by violent resistance by employers within a capitalist democracy. If full employment is taken to its logical conclusion, it results in the liquidation of the capitalist class, because the working class freed from the spectre of destitution sees no reason to allow themselves to be subject to their dictates. As they are able to bid up their wages, profits fall dramatically, investment strikes ensue, and capital flight into the undeveloped world decimates industry. Far from idle speculation, all of the above actually happened all across the developed world in the 1970’s, resulting in the rise of neoconservatism and the opening blows in what would become an all-out war against the Welfare State. Thus, under the existing system, the crusade for full employment is either to be abandoned, or risks slipping into autocracy.

Far from having a capitalist democracy, Kalecki concludes, in trying to eradicate unemployment, we risk being confronted with a choice: capitalism or democracy.

And yet, even in Kalecki’s dark vision, he found a cause for hope. Economics and capitalism are not synonymous, and the pursuit of sound economic policy, in much the same vein of critique Keynes argued, does not necessarily have to agree with what would be preferred by private industry. The conventional tools of reducing either the rate of interest or the tax rate in order to induce investment could be used to level out the business cycle, but they by no means imply full employment, or, for that matter, are immune to being exhausted. Today, central banks now entertaining the very consumption subsidies Kalecki believed would prove inevitable in the form of negative interest rates, and treasuries depleted from decades of tax competition, are a testament to his insight.

In place of the conventional view, Kalecki sided with Democracy. But like many in the liberal tradition, he valued the individual freedom and initiative which capitalism affords some, and thus was measured in his conclusion: “If capitalism can adjust itself to full employment, a fundamental reform will have been incorporated in it. If not, it will show itself an outmoded system which must be scrapped.” Kalecki grappled with perhaps some of the darkest considerations one can imagine as an economist, and in the process synthesized economics with history, and human ideals with human nature. And yet, he did not shirk from his conclusions, but rather remained convinced that to grapple with economics was to speak frankly about the good, the bad, and the ugly in “The Study of Man”. In this way, he affords us an admirable example of what being an economist is all about.

In place of the conventional view, Kalecki sided with Democracy.

Naturally, there remain a dizzying amount of economists who have dreamed in one element of the discipline or another, and it would be impossible to do them all justice here. But a small list of those whose work goes entirely unspoken within standard courses should suffice to demonstrate the sheer scale of all the closed doors presented to undergraduates in the history of their own discipline. Figures like Joan Robinson, Alexander Gerschenkron, Rexford Tugwell, John Kenneth Galbraith, Nicholas Kaldor, Hyman Minsky and others all made valuable contributions to economics.

What Happened to the Dreamers?

Whether one agrees or disagrees with the conclusions of Keynes and Kalecki, or any of the other dreamers they may have recognized, one thing should be clear: their approach to the discipline was far more intricate than that which we see taught today. It is immaterial whether one is a Neoclassical, a Neo-Keynesian, or any other one of the disciplines completely ignored within the conventional teaching of economics today (Cambridge Economist Ha-Joon Chang counts at least eight distinct economic methodologies, of which at most two feature in a standard undergraduate education). The economic discipline can ill afford to remain as singular, insular, and ahistorical as it has been, as different approaches each bring with them their own set of strengths and weaknesses. It should embrace this, promote critical discussion amongst undergraduates, and revisit its own sprawling literature, rather than desperately try to contain the political content and complexity inherent to its subject matter in a vacuum.

Once economists do this, and begin to grapple with the challenges of the unfolding century, they will truly be ready to dream.