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Polanyi and Keynes on the idea of ‘self-adjusting’ markets

from Lars Syll

Paul Krugman has repeatedly over the years argued that we should continue to use maistream economics hobby horses like IS-LM and AS-AD models. Here’s one example:

So why do AS-AD? … We do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility. Or to put it differently, you do want somehow to make clear the notion (which even fairly Keynesian guys like me share) that money is neutral in the long run.

I seriously doubt that Keynes would have been impressed by having his theory being characterized by​ catchwords like “tendency to return to full employment” and “money is neutral in the long run.”


One of Keynes’s central tenets is that there is no strong automatic tendency for economies to move towards full employment levels. 

Money doesn’t matter in mainstream macroeconomic models. That’s true. According to the ‘classical dichotomy,’ real variables — output and employment — are independent of monetary variables, and so enables mainstream economics to depict the economy as basically a barter system.

But in the real world in which we happen to live, money certainly does matter. Money is not neutral and money matters in both the short run and the long run:

The theory which I desiderate would deal … with an economy in which money plays a part of its own and affects motives and decisions, and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted in either the long period or in the short, without a knowledge of the behaviour of money between the first state and the last. And it is this which we ought to mean when we speak of a monetary economy.

J. M. Keynes A monetary theory of production (1933)

    December 3, 2018 at 5:52 am

    being in produce and retail business for over twenty years,that is (in Greece) from the good times to austerity , I can tell you first hand: one can have a really good product that people like and WISH to have but do not have the money to bye it, that mr Krugman’s theory it is not for a healthy economy, it just leads to a wild situation that profit is made by the “vultures” of the market.

    • lobdillj
      December 3, 2018 at 12:49 pm


  2. Ikonoclast
    December 5, 2018 at 12:28 am

    I note above the mention of real variables and monetary (notional) variables. This is the crux of the ontological puzzle of economics which conventional economics simply has not and cannot dealt with. How and in what manner do real systems (real ecosystems and real economies) interact with formal systems (money-finance systems and legislated laws, regulations and beliefs) and vice-versa? How can a unifying theory of real quantities and notional quantities be derived?

    The implicit ontological basis of conventional economics is Cartesian dualism which posits res extensa (the material realm of things with physical extent and time duration) and res cogitans (the immaterial realm of thought). That which a priori assumption has put apart can never be reunified in subsequent theorising unless the chain of deductions contains a logical error. The logical error in this case is the claim that conventional economics is a descriptive discipline.

    Under the assumption of dualism, any developed theory of how formal money systems interact (must interact) with real systems (real economies embedded in real ecosystems and the biosphere) is perforce a prescriptive theory not a descriptive theory. Conventional economics essentially says; “This what we say money is, how it should work and how it should interact with real systems. This is what we prescribe.” Any claim by conventional economics to be descriptive rather than prescriptive is false.

    In practice, we find that real systems do not react well when the actions (including the money-finance actions) prescribed by conventional economics are applied to the real world. Ecological collapse, climate collapse, species extinctions, human sufferings and deaths are the real results. We can see this developing situation in clear terms at our current stage of history, of economic and scientific development. This irrefutable empirical evidence of a critical and disastrous disjunction ought to be enough on its own to convince us that conventional economics is seriously wrong, about everything.

    The detailed ontological arguments would take many screens of text. I’ve implied the bare bones above. Suffice it to say here that I adopt a form of priority monism (the cosmos as a single complex relational system) as the only ontology which is (a) consistent with all of modern science (cosmology, physics, evolution) and (b) which promises a method for integrating the ontology of (a new) economics.

  3. Rob Reno
    December 5, 2018 at 7:03 pm

    That comment is a keeper Ikonoclast.

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