Neoclassical economics and its discontents
from David Ruccio
Economic austerity in the midst of an ongoing depression makes absolutely no sense. But that hasn’t stopped neoclassical economists, central bankers, presidents and prime ministers, and legislators in the United States and across Europe from trying to impose it.
However, there are some dissenting voices, from unexpected quarters.
One is Nobel laureate Joseph Stiglitz, who argues against “another costly experiment with ideas that have failed repeatedly.”
a resurgence of right-wing economics, driven, as always, by ideology and special interests, once again threatens the global economy – or at least the economies of Europe and America, where these ideas continue to flourish. . .
There is an alternative: an economic-growth strategy supported by the European Union and the International Monetary Fund. Growth would restore confidence that Greece could repay its debts, causing interest rates to fall and leaving more fiscal room for further growth-enhancing investments. Growth itself increases tax revenues and reduces the need for social expenditures, such as unemployment benefits. And the confidence that this engenders leads to still further growth.
Regrettably, the financial markets and right-wing economists have gotten the problem exactly backwards: they believe that austerity produces confidence, and that confidence will produce growth. But austerity undermines growth, worsening the government’s fiscal position, or at least yielding less improvement than austerity’s advocates promise. On both counts, confidence is undermined, and a downward spiral is set in motion.
The other is Bruce Bartlett, who held senior policy roles in the Reagan and George H.W. Bush administrations, and now warns against a repeat of 1937:
By 1937, President Roosevelt and the Federal Reserve thought self-sustaining growth had been restored and began worrying about unwinding the fiscal and monetary stimulus, which they thought would become a drag on growth and a source of inflation. There was also a strong desire to return to normality, in both monetary and fiscal policy. . .
This combination of fiscal and monetary tightening – which conservatives advocate today – brought on a sharp recession beginning in May 1937 and ending in June 1938, according to the National Bureau of Economic Research. Real G.D.P. fell 3.4 percent in 1938, and the unemployment rate rose to 12.5 percent from 9.2 percent in 1937. . .
While the odds of another recession are still low, they are increasing. Given the economy’s fragility, policy makers need to be very careful, because it may take only a small misstep on either the monetary or fiscal side to tip the balance. The experience of 1937-38 should be a warning.
The failure of free-market capitalism. The disaster of 1937. The surprise is not that neoclassical economics has generated a few discontents but that they are still so few.
for 30 years right wing talk radio has been demonizing any person or idea that did not fit the extreme capitalist ayn rand model. They have built an incredibly solid base for whom no amount of reason or passionate exhortation of facts can penetrate. All they need is a few good Austrian school economists to prove they are right.
They appeal to people who want a simple model of government and life in general.
They already have all the excuses they need to blame science, intellect, that is the commies for the coming economic failures. Even the successes can be turned on its head.
We ignored them at our peril now we will have to live out their ideological / political reality, facts notwithstanding.
oh my that sounds hopeless and I am in truth an optimist about people egad
One really shouldn’t be surprised at the stupidity of the austerity policies pursued by politicians in Europe and elsewhere around the world today, given the utter nonsense that leading neoclassical economists teach in their textbooks. I have an article on e. g. Charles I. Jones treatment of Keynes in his Macroeconomics (2nd ed 2011) here:
http://larspsyll.wordpress.com/2011/07/14/chad-jones-macroeconomics-textbook-utter-nonsense-on-keynes-and-wage-rigidities/
“The failure of free-market capitalism.” They call the US economic system “capitalism” because “capital” dominates, as was made evident by the bailouts of financial follies. Capital dominates government to obtain subsidies, while the big landed interests keep their own influence hidden by getting both pro-market and anti-market advocates to call their assets “capital.” Since the colossal subsidies to land value and their financial derivatives are the opposite of a pure market, the term “free-market capitalism” is an Orwellian contradiction in terms.
I wonder if Joseph Stiglitz, Bruce Bartlett and other mainstream economists will finally notice that growth is the problem when every country on earth is at full employment. Perhaps they will finally gain insight peering through choking smog and radioactive acid rain from behind the locks of gated communities.
Well, Mr Ruccio, all the federal money spent by the BO administration has done nothing more than to dig America deeper into the pit of debt…
Your solution to lift the economy via government spending has fail and badly if I may say so…
Neo classical economics is as wrong (or as right…) as euclidean geometry. It’s a «make believe» fairy tale that sometimes and under specific circumstances happens to be right.
Worth to read article:
http://www.eoearth.org/article/Neoclassical_economic_theory
Thanks for this, Sergio, it’s a gem. I must also try and get hold of Mirowski’s “More Heat than Light”. A few insights this promoted:
If Menger followed Adam Smith, the crucial point is surely that Smith had followed his friend David Hume’s ‘Treatise on Human Nature’ (I. on understanding, II. on motivation, III on moral government) into the abyss of subjective morality, i.e. government by enforcement of mores rather than the teaching of ethical principles.
Keynes (1935), taking up the significance of time, is perhaps following Eddington (1928) on ‘The Nature of the Physical World’, famous for its concept of the Arrow of Time. A pity, then, that Eddington didn’t discuss Fourier’s transformation of a static ’1′ into sine and cosine waves of zero average but square-law product, and Aristotle’s discussion of ‘Politics’ in terms of musical harmonisation. When four different groups of people do different things on unharmonised time-scales the products will sometimes add and at at others cancel, generating booms and busts on longer timescales. Since reading Keynes I’ve seen him anticipating the basic Cybernetic interpretation of Smith’s Invisible Hand, but at perhaps harmonising the multitude of economic “micro” processes is the condition of “macro” error control?
A comment on Faraday’s demonstration that magnetic fields do not operate like gravity (i.e. return to their opposite pole) is highly significant in light of electrical and monetary circulation. Correction of the article’s four-phase monetary circulation diagram was my own starting point. The money, production, distribution and consumption phases all involve people (but different groups of people) communicated in with each other, but the cross-communications are missing; likewise the shadow economy within the banking system and the biological ecology supplying real resources (this last presumably being what eoearth.org is wanting to include).
What I found particularly thought provoking were the comments on game theory. Cybernetics in its four phase “PID servo” form might possibly be interpreted as the objective and rules of a game, wherein the corrective rule of covering costs is being misinterpreted as the objective of making money.