Home > The Economics Profession, The Economy > The old time religion of classical economics and further economic disaster

The old time religion of classical economics and further economic disaster

from Paul Davidson

After the shellacking the Democrats and Obama took in this November election, it is clear that the old time religion of classical economics will be coming back into fashion.  The result is likely to be further economic disaster.

I am not surprised by the failure of the Obama Administration to win over the American people to a progressive economic program.     On pages13 to 18 of my book THE KEYNES SOLUTION: THE PATH TO GLOBAL ECONOMIC PROSPERITY – ( written in January  2009) —  I compared what I expected of Obama vis-à-vis what Roosevelt did in the first few years of his administration. 

I cited a  letter written by Keynes and published in December1933 in the New York Times where Keynes warned  the president that there were two goals — Recovery and overdue social Reforms.  But Keynes warned if one goes for the social reforms before full economic recovery (full employment) was achieved, then any reforms “will upset the confidence of business. And it will confuse thought “. Instead Keynes recommended just concentrate on recovery.  Once the president succeeds at achieving that goal,  then reforms will come much more easily!

I suggested that if Obama followed the “jump start” advice of his economic advisors for a small “stimulus” program just to get the private economy turned around , then the nation would not get the full recovery we needed and  all reform as well as full recovery will be jeopardized.

Given the politics of austerity,  we face maybe a decade of economic  disaster. Progressive heterodox economists must get out in front with a Keynes-style of economic thinking – for Keynes’s analytical framework is the only complete available one that is not just a variant of classical theory.  Keynes theory of liquidity  can deal with full employment recovery, international trade imbalances, policies to prevent inflation and deflation, and an understanding of the role of financial  markets in a money using entrepreneurial economy. – what Soros calls a reflexivity economy.

It is necessary to immediately put forth a consistent plan for not only the domestic economy but also for the international payments system to end the huge trade imbalances that have occurred –Mr. Geithner’s call for devaluing the dollar relative to the Chinese yuan will not do it.

Nor will relying on some Old or New Keynesian  variants  of classical economics such as Stiglitz’s assymetric information or some other MIT or Harvard New Keynesianism –since all these models assume that the economic system is a classical system except for some ad hoc restraint on the flexiblity of prices or  constraint on obtaining complete information about a future predetermined by today’s market fundamental.  In the long run all these mainstream “Keynesian” models will provide a full employment solution when fixities are removed and full information preceived. It is only these ad hoc constraints that prevent short run optimal results — theerfore the implication of these mainstream models is get government out of the way and the market, in the long run, will prove to be optimal!

My book THE KEYNES SOLUTION provides a complete alternative program to the various classicalmodels that is going to dominate Washington in the next few years – as Obama tries to compromise with the conservatives such as Paul Ryan  and Tea Party people like Rand Paul. 

The American people are being interpreted as saying no more deficits—but what they really want back is prosperity and jobs for all who are willing to work.  And if we can show them why these goals require governemnt deficits to get to prosperity , they will accept that. We have to get into the public forum the kind of progressive program that is in the Roosevelt tradition and currently can an economic foundation to provide  a  good economic future for years to come.

Until we can provide a single consistent program for economic prosperity, all the other goals of progressive thinkers will remain in the dustbin!! The conservatives and their classical theory will dominate, even though they are wrong – because, as they say in politics, “You can not beat Somebody with Nobody”.

The only body of economic thinking available to take on, and beat, classical thinking, is Keynes’s original analytical foundation – and not the Keynesianism of Samuelson,or the New Keynesianism of Stiglitz and other MIT and Harvard graduates. 

 And remember that the original Keynes analysis implied a nonergodic stochastic process (Keynes called “uncertainty”) is fully compatible with the reflexivity analysis put forth by George Soros. It is when people fear uncertainty that they demand liquidity  rather than goods and services.  And given all the cash bankers and businesses are sitting on, can anyone doubt the problem is one of too much uncertainty asnd private demands for liquidity  -with the resulting lack of aggregate demand for goods and services?


  1. Peter Radford
    November 10, 2010 at 3:34 am

    Thank you Paul.

    There can be no ‘real world’ economics without confronting uncertainty. If an economy is simply a non-ergodic search through a vast solution space, which seems an apt abstract description, then classical economic theory describes a very tiny set within that space – it is not an impossible set of solutions, but has a vanishingly small probability of occurrence. It is of no real world consequence, has no policy relevance, and is nothing but an interesting, not particularly relevant, intellectual exercise. People’s lives should not depend upon such theories. Thus far, in the history of economic thought, only Keynes confronts uncertainty head on. His ideas are therefore more useful.

    Put another way: the odds of our economy ever arriving at a configuration that matches neoclassical theory is vanishingly small. It will never happen. Why we waste time on that theory baffles me.

  2. November 11, 2010 at 1:58 am

    People have to get it into their heads that you can’t just mess around with the money supply in order to fix structural economic problems

  3. Alice
    November 11, 2010 at 9:28 am

    Fiddling the money supply? The helicopter never had a big enough engine. It just delivers and entree and leaves the people starving.

  4. Anonymous
    June 10, 2011 at 7:02 pm

    After reading about Richard Koo’s “balance-sheet recessions” I now view economic progress as constant “dance of the balance-sheets”. And Minsky’s view was that public debt buildup during WW2 offered private sector safe asset that they could leverage upon.

    And indeed, statistics show constant private sector debt leveraging from WW2 to global financial crisis.

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