Cambridge economics has died out
from Lars Syll
A couple of weeks ago yours truly had a review of Diane Coyle’s Cogs and Monsters in WEA Commentaires. As I wrote, there’s a lot in the book to like, but unfortunately also some things very hard to swallow. James Galbraith seems to argue along the same lines in his Project Syndicate review:
Coyle subscribes to the grand illusion that price adjustment is the economy’s prime mover. But as the Cambridge Keynesian economist Nicholas Kaldor noted in his slim 1985 book, Economics without Equilibrium, “the intuitive belief that prices are the key to everything” is simply wrong. The foundation on which Coyle places modern mainstream economics is a myth …
When I attended the University of Cambridge in 1974-75, I read Keynes, met Piero Sraffa, listened to Joan Robinson, and studied with Kaldor, Luigi Pasinetti, Richard Goodwin, Ajit Singh, Wynne Godley, Robin Marris, and Adrian Wood. Back then, it was understood at Cambridge that markets do nothing like what Coyle claims they do. Just as Einstein had erased Euclid’s axiom of parallels, Keynes’s General Theory had long since obliterated the supply curves for labor and saving, thereby eliminating the supposed markets for labor and capital.
It followed that the prices of production were set by costs (mostly labor costs and interest rates), while quantities were determined by effective demand. Markets were not treated as if they were magical. It was obvious that most resources and components did not move under the influence of an invisible hand. Rather, they moved according to contracts between companies on terms set by negotiation, as had been the case for more than a hundred years …
But the Cambridge school of economics that understood these things has died out. It was targeted in the great intellectual purge of the Thatcher era, and it was pried from its footholds in North America by early-stage McCarthyism, Reaganism, the MIT self-proclaimed Keynesians, and the Chicago School. Only a few scattered survivors remain today …
Coyle concludes that “economics needs to change.” She is surely right about that. But it is impossible for economics to advance as long as it remains anchored to the mainstream bedrock on which Coyle’s own training was based …
Cambridge has forgotten Cambridge, and it is poorer for it.
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Real-World Economics Review Blog 
Lars Syll cited good and essential paragraphs from James Galbraith’s review of Diane Coyle’s Cogs and Monsters:
Why did Cambridge school of economics die out? Variety of reasons may be cited. In my opinion, the most important point is that heterodox economists in the Cambridge tradition should have shown how the market works if the prices of production were set by costs (and consequently if they do not work as balancing mechanism between demands and supplies) and if quantities were determined by effective demand (and consequently if they were not regulated by ups and downs of prices). So far, heterodox economists were too much concentrated on macroeconomics (even if they were inclined to criticize neoclassical macroeconomic theories). We need to explain how a large system that extends to a world-wide network of transactions and productions works not by prices but by the principle of effective demand. We need to explain what kind of functions they play, if the prices were not the main mechanism that brings demand and supply near to the equal?
See my papers:
(1) A new framework for analyzing technological change (2020)
(2) The principle of effective demand: a new formulation (2021)
N.B. If you have difficulty in obtaining a copy of (1), please send me an e-mail at y@shiozawa.net. (2) is published in an open-source journal. You can freely download it.
This is a sentence I found in a review of Diane Coyle’s book Cogs and Monsters in Cato Institute Web page:
This is an estimate of the 180 degree away from James Galbraith. Why is this kind of misunderstanding possible? This is a clear sign of confusion that underlies economic thinking.
In Section 3 “Comparision of two value systems” of my paper A new framework for analyzing technological change (JEE 30, 2020), I compared two functions of prices: allocative versus dynamic efficiency. Hayek emphasized the importance of allocative efficiency in his paper: The Use of Knowledge in Society (1945). In my opinion, this misunderstands the nature or dynamics of modern capitalism. Increase of real wages of workers is only possible by introductions of more “efficient” production techniques. The “efficiency” here only means that the unit cost of the new technique is less than that of the incumbent ones. With this half-blind choice of production techniques the economy normally progressed and progresses amazingly provided that sufficient effective demand is given. The effect of this groping process is tremendous. Hayek and Coyle misunderstand this mechanism and base their arguments on this misunderstanding.
It may have been true once that workers shared in productivity gains, but for a long time now, especially in the United States, this has not been true. It is economic myth making to claim new technology leads to higher real wages. The devil is in the details. Only the few who are highly skilled benefit from these higher _real wages_ (~10% or less) while the lion’s share of these gains to the .01% who own the monopoly capital. It is a myth that higher productivity leads to higher wages when reality shows real wages have become detached from productivity growth. The problem with literature only economists like Shiozawa is they parrot old canards that are obsolete and no longer true. They operate in a world of junk economics divorced from changing reality ending up as little more than intellectual parrots of half-truths that may have once been true but long ago have ceased to be true due to ever changing circumstances of economic power relations. In the days when unions were strong, they could negotiate a fair share of productivity gains thereby increasing their real wages. Those days are long gone in the age of union busting monopolies like Amazon. Shiozawa’s repeated parroting of the falsehood that new technology leads to higher real wages devoid of context is typical of the conservative response to real-world realities; ignore reality and parrot ideology.