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Utopia and macroeconomics

from David Ruccio


From the beginning, mainstream macroeconomics has been a battleground between the visible and the invisible hand.

Keynesian macroeconomics, represented on the left-hand side of the chart above, has an aggregate supply curve with a long horizontal section at levels of output (Y or real GDP) below full employment (Yfe). What this means is that the aggregate demand determines the actual level of output, which can be and often is at less than full employment (e.g., when AD falls from AD1 to AD2, output to Y1, and prices to P2), with no necessary tendency to return to full employment and price stability. Therefore, according to Keynesian economists, the visible hand of government needs to step in and, through a combination of fiscal and monetary policy, move the economy toward full employment (at Yfe) and stable prices (at P1).

Neoclassical macroeconomists, like their classical predecessors, have a very different view of the macroeconomy, which is represented on the right-hand side of the chart. They start with a vertical aggregate supply curve at a level of output corresponding to full employment. Therefore, according to their theory—often referred to as Say’s Law or “supply creates its own demand”—aggregate demand does not determine the level of output; instead, it determines only the price level. Thus, for example, if aggregate demand falls (e.g., from AD1 to AD2), output does not change (it remains at Yfe)—only the price level falls (from P1 to P2). On the neoclassical view, the invisible hand of the market maintains full employment (through the labor market) and reverses price deflation (through the so-called real-balance effect) by boosting aggregate demand (back to AD1 from AD2).

Anyone who has read or heard the intense debates concerning capitalism’s recurrent crises, recently and going back to the 1930s, knows that there are significant theoretical and policy differences between Keynesian and neoclassical macroeconomists. For example, Keynesians focus on uncertainty (especially the uncertain knowledge of investors) and the important role of government (especially fiscal) policy, while neoclassicals emphasize the supply side (especially the role of correct “factor prices,” particularly wages) and the necessity of getting government out of the way of markets (relying, instead, on rules-driven monetary policy).*

But there are equally significant similarities between the two approaches. For example, both Keynesian and neoclassical economists tend to blame economic downturns on exogenous events. There is nothing in either theory that recognizes capitalism’s inherent instability. Instead, mainstream macroeconomists of both stripes direct their attention to equilibrium outcomes—of less-than-full employment in the case of Keynesians, of full employment for neoclassicals—such that only something outside the model can shift the underlying variables and cause the economy to move away from equilibrium. That’s why neither group was able to foresee the crash of 2007-08, let alone the other eighteen recessions and depressions that have haunted capitalism during the past century. Their theories literally don’t include the possibility, endogenously created, of capitalism’s ongoing crises.

There’s another, perhaps even more important, similarity I want to draw attention to here: their shared utopianism. The premise and promise of both Keynesian and neoclassical macroeconomics is that, with the appropriate institutions and policies, capitalism can be characterized by and should be celebrated for achieving full employment and price stability. Those are the shared goals of the two theories. And their criteria of success. Thus, each group of macroeconomists is able to claim a position of expertise when the actual performance of the economy achieves, or at least moves closer and closer to, a utopia characterized by levels of output and a price level that corresponds to full employment and price stability.

It is precisely in this sense that the economic utopianism of mainstream macroeconomics conditions and is conditioned by an epistemological utopianism. Because they know how the macroeconomy works—because of their theoretical and modeling certainty—both Keynesian and neoclassical macroeconomists claim for themselves the mantle of scientific superiority. These are the lords of macroeconomic policy, domestically and internationally, moving back and forth among their positions as academics, corporate advisers, and policy experts. Hence the persistent claim on both sides that, if only the politicians and policymakers listened to them and adopted the correct economic policies, everything would be fine. Not to mention the ongoing complaints, again on the part of both groups of mainstream macroeconomists, that their advice has been ignored.

That, of course, is where the critique of mainstream macroeconomics begins—with a radically different utopian horizon. When the explanations and policies of either side are said to have failed, there’s a shift to the opposing viewpoint. Thus, for example, neoclassical macroeconomics held sway (in the United States and elsewhere) in the run-up to the crash of 2007-08—just as it had in the years preceding the first Great Depression. Leading macroeconomists and their students had moved away from and largely ignored anything that had to do with Keynesian macroeconomics (including, most notably, Hyman Minsky’s writings on financial instability). Then, of course, the tables were turned and at least some mainstream macroeconomists went back and discovered (many for the first time) the theories and policies associated Keynesian tradition.

It’s a familiar back-and-forth pendulum swing that we’ve seen in many other countries, in other times. From neoclassical free markets and deregulation to government stimulus and one or another form of reregulation—and back again. But we also need to recognize that the failures of mainstream macroeconomics, when examined from an alternative perspective, have actually succeeded. As I wrote back in 2010, the failure of neoclassical macroeconomists were apparent to many: they

failed to see the onset of the current crises; they have had little to offer in terms of understanding how the crises occurred even after the fact; and they certainly haven’t had much in the way of good policy advice to solve the problems of unemployment, poverty, and inequality. . .

On another level, mainstream economists have succeeded. Not only have they maintained their hegemony within the discipline; their models and policy advice have kept the discussion confined to tinkering with the existing set of capitalist institutions. In terms of policy: a bail-out of Wall Street and a mild set of financial reforms, a small stimulus program, and an expansionary monetary policy. And intellectually: a rediscovery of Keynes and an allowance of behavioral approaches to finance. They haven’t proposed even the public works programs and financial reorganization of the New Deal, let alone an honest debate about capitalism itself.

In this sense, the continued failure of mainstream economists has become a success for capitalism.

That’s why we need to question the shared utopianism of the two sides of mainstream macroeconomics. What has gone missing from much of the current debate, even outside the mainstream, is that full employment and price stability are consistent with the worst abuses of contemporary capitalism. As David Leonhardt recently explained,

The headlines may talk about growth, but we are living in a dark economic era. For most families, income and wealth have stagnated in recent decades, barely keeping pace with inflation. Nearly all the bounty of the economy’s growth has flowed to the affluent.

And if you somehow doubt the economic data, it’s worth looking at the many other alarming signs. “Deaths of despair” have surged. For Americans without a bachelor’s degree, one social indicator after another — obesity, family structure, life expectancy — has deteriorated.

There has been no period since the Great Depression with this sort of stagnation. It is the defining problem of our age, the one that aggravates every other problem. It has made people anxious and angry. It has served as kindling for bigotry. It is undermining America’s vaunted optimism.

In fact, an even stronger argument can be made: the various attempts to move the economy toward full employment and price stability have created the conditions whereby capitalism has both broadened and deepened its presence and made the lives of the vast majority of people even more unstable and insecure.

The utopianism of mainstream macroeconomics represents a dystopia for “most families” attempting to survive within contemporary capitalism.

What’s left then is a critique of the assumptions and consequences of mainstream macroeconomics—of both neoclassical and Keynesian economic theories. The goal is not just to tinker with the theories (e.g., by bringing finance into the discussion) or the policies (such as technocratic changes to the tax code and raising the level of productivity). Recognizing how narrow the existing discourse has become means we need to question the entire edifice of mainstream macroeconomics, including its utopian promise of full employment and price stability.

Only then can we begin to recognize how bad things have gotten under both the successes and failures of mainstream macroeconomics and to imagine and invent a radically different set of economic institutions.

That’s the only utopian horizon currently worth pursuing.


*Throughout I refer to two groups of Keynesian and neoclassical macroeconomists. But, of course, both theories have changed over time. Today, the two opposing sides of mainstream macroeconomics are constituted by new Keynesian and new classical theories, with increased attention to the “microfoundations” of macroeconomics. The former emphasizes market imperfections (such as price stickiness and imperfect competition), while the latter dismisses the relevance of market imperfections (and emphasizes, instead, flexible prices and rational expectations). And then, of course, there’s the ever-shifting middle ground, which is the basis of a macroeconomics according to which new Keynesian and new classical are both valid, at different points in the business cycle. Like the earlier neoclassical synthesis, the middle ground of “new consensus macroeconomics” is the approach presented to most students of economics.


  1. Manuel Angeles
    April 29, 2018 at 4:19 am

    Brilliant little piece

  2. Prof James Beckman, Germany
    April 29, 2018 at 9:00 am

    Well done, indeed. Off the top of my head, I would add the three “little” matters of one global market for most production, much unrecorded production/income (20%?) & the group nature of much production/consumption, the latter two factors making the recording/analysis of economic data highly inaccurate.

  3. April 29, 2018 at 5:39 pm

    It strikes me that a collapse of business and/or financial confidence can have at least seven possible causes, and that a robust macro-economic theory ought to be able to address all seven of them:

    1. A weakening of aggregate demand due to an exogenous event – major global bad news
    2. A weakening of aggregate demand due to a shortage of money supply (Friedman)
    3. A weakening of aggregate demand due to the growth of personal and corporate debt (Keen)
    4. A weakening of aggregate demand due to increasing unemployment and low wages (Keynes)
    5. A weakening of aggregate demand caused by a Minsky moment – excessive confidence leading to risky investments, failure, and a collapse of confidence (Minsky)
    6. An accumulation of bank debt resulting in the failure of inter-bank trust (2008)
    7. The failure of central banks to intervene after a series of banking failures

    • Prof James Beckman, Germany
      April 29, 2018 at 6:25 pm

      Guy, from my consultant’s view in Europe, with Central Banks pumping out liquidity, as for the past ten years, much of the list becomes compressed to massive bank asset compression due to fines & outright loan/investment losses + an enormous weakening of demand by over- borrowing & outright bad employment. We have seen all of these, haven’t we?

  4. April 29, 2018 at 10:09 pm

    So yes, “the continued failure of mainstream economists has become a success for capitalism … a radically different set of economic institutions [has become] the only utopian horizon currently worth pursuing.” Polanyi would have agreed.

    Thinking outside the box, then, it seems we have Machiavellian Randians and Austrians (encouraging elites to be economical with the truth) and Post-Keynesians and Marxists (encouraging elites to ” invent a radically different set of economic institutions”?).

    What’s an institution? What’s a utopian horizon? What’s Post-Keynesianism?

    Twenty years ago I would have thought of an institution as an authority with power to discipline, but now I see it as what that does, so a convention is an institution which governs by forming habits. The present convention is that money conveys wealth, so we habitually act as though it did. The fact is that it extracts wealth, so we need the to invert the convention so we habitually act as it if it were a credit limit, which cannot be repaid in kind, only by service.

    Having actually read ‘Utopia’, I’ve long been irritated by those who haven’t, but picked up Marx’s misrepresentation of it as an unrealistic aim. It was actually positing a non-Christian common sense as being more Christian than the supposed Christianity of Tudor England. But a utopian horizon? That’s interesting. An aim, but a Christian one, and not a specific objective but more a still evolving scenario? Isn’t that exploratory type of aim an alternative to the current (rival) institutions of nominally aimless laissez-faire (capitalism) and paradoxically materialist humanism (socialism)?

    What’s Post-Keynesianism? Intuitively that is what I thought of myself as, but I found this:

    “It is defined by the view that the principle of effective demand as developed by J. M. Keynes in the General Theory (1936) and M. Kalecki (1933) holds in the short, as well as in the long run. That is, that economic activity in a capitalist monetary economy is demand-driven and that there are no built-in mechanisms that guarantee full employment and full utilisation of capacities. Post-Keynesians are united in their rejection of the different versions of neoclassical economics as inappropriate for the analysis of a monetary, capitalist economy. They are also unanimous in their joint endeavour of building an alternative economic theory that is more suitable for analysing the inherent features of modern capitalist economies, such as unemployment, (financial) crises, business cycles, depressions, technological change, and uneven development”. They have an understanding of the economy as being structured by institutions such as firms, labour unions, wage and credit contracts, government regulation and so forth”.

    “… that is more suitable for analysing the inherent features of modern capitalist economies”?

    Sure I’m interested in building an alternative economic theory, but starting from the real world, evolution, definitions of ‘economic’ and ‘theory’ general enough to include all economies, and aiming not just to analyse but to enable the elimination of the objectionable features of “the inherent features of modern capitalist economies, such as unemployment, (financial) crises, business cycles, depressions, technological change, and uneven development”. However implausible this may sound to those who don’t believe it is possible, I have already built it. Its principles are that the economy is what it and its institutions do, not what they look like, and its theory won’t predict what is over the horizon, but does tell us where to look and how to deal with problems. Change will come not by changing the material institutions, but replacing the institutionalised (habitual) understanding of money with credit and that of ownership with stewardship will change what they do and make unnecessary accumulation undesirable.

    • Prof James Beckman, Germany
      April 30, 2018 at 5:52 am

      Dave, you say lots of true & useful things, in my opinion. On the matter of demand, it indeed does drive the system as bank credit/stock purchases allow BOTH buyers & producers to enter the market place. Note that bank credit often has to be secured by assets, wthether an athlete’s bankable name, secuities or physical assets, etc.
      The current “let business do it” model is of course limited by commercial competitors, as we now see the third/fourth US telekoms now trying to merge for the third time. And Mr Trump doesn’t want to sell US tech to some nations, although most US tech is available in other nations who themselves can develop it. Competition indeed is global, another point.

  5. Craig
    April 30, 2018 at 6:36 am

    Macro-economics has become a discipline that confuses more than it enlightens, and is rigged around fallacies that have become truths to guarantee this fact, and to hamstring any attempt within the current monetary paradigm at finding a solution.

    Take for instance the paradox of thrift and the quantity theory of Money. These are both true but only within the paradigm of Debt Only and only within the delusion that free markets actually are free and should be left alone when what they really are within the current paradigm is in a continual state of unethical disorder increasingly bordering on chaos….and that actually require good order/control. Now the word control unfortunately has negative connotations, but its proper definition within economics and any other temporal universe system is simply control as in starting, changing and stopping, i.e. flowing which actions align it with the nature of anyone and anything embedded within the temporal universe.

    With the integration of the new and primary monetary and economic paradigm of Direct and Reciprocal Monetary Gifting the paradox of thrift, quantity theory of money and “free” markets are transformed into fallacies by the insights and policies of the new paradigm. So was it when nomadism as the means of survival was transformed into the increased abundance and survivability of agriculture, the ego and terra-centric cosmology of Ptolemy was transformed into the scientific truth of helio-centrism and sanctification via the church’s sacraments was transformed by the realization that sanctification was possible by a direct relationship between oneself and God and/or one’s self awareness.

    The project of macro-economics is to create a system that enables the individual to become free to create his or her own concept of utopia which is something entirely different from the straight jacket of a Utopian one size fits all system.

  6. Econoclast
    April 30, 2018 at 8:41 pm

    Excellent post.

    Predatory corporate capitalism is — and has been for decades — the dominant institution of our time. Some will argue that I am being redundant, that capitalism is corporate and inherently predatory. I agree, but leave the redundancy for emphasis on these qualities.
    “If we are to oppose this institution, or change it, or engage in any sort of reform, or simply grapple with our favorite issue, we must understand the inherent nature of the dominant beast.

    In my view, these are some of the inherent qualities of the corporate capital institution: irresponsible (privatizes gain, socializes losses); unstable; fosters income and wealth inequality; seeks to commodify everything in service to profit (or market share or financialized gain); fosters and depends on unsustainable growth; exploits without self-restraint both people and the natural world; and is autocratic, hierarchical and counter-democratic. The power of capitalism creates a culture that sanctifies property ownership and promotes the myth of rugged individualism and the illusion of free markets. This power is protected by the violence of police and military against democratic social change, and its brutality is clothed in the finery of neoclassical economic orthodoxy.

    In this blog some rightly say that technical criticism of economics orthodoxy is not enough and we must also craft an alternative economic vision. I agree. However, that vision must rest on the fundamental principle that the overriding goal of political economy is to manage the human part of the biosphere. The economy is a human artifact, effectively designed by the people and managed by people for people. If the institutions and leaders aren’t up to the job of preserving their part of the biosphere and instead act to increase instability and inequality, they must be replaced by the affected people.

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