A Guide to Post-Keynesian Economics
I suppose that philosophy is still queen of the social sciences, but I fear that economics has become the knave. The awed regard in which the discipline was once held has given way to something bordering on disrespect. This change in public esteem primarily arises from the inability of the economics profession to give a coherent explanation for, and therefore to prescribe a workable policy against, inflation. But this is by no means the only problem on its hands. Following the advice of the profession, the dollar was finally allowed to “float” in 1971, but far from removing the dollar crisis, floating seems to have worsened it. Heeding the best economic strategies, we have sought for an entire generation to spur economic development, but the World Bank has recently admitted that 40 percent of the population of the “developing” lands still lives in what the Bank calls “absolute poverty.” Meanwhile economists confess to their ignorance and impotence with regard to the decline in American productivity, the emergence of an alienated and unemployed underclass, spreading urban blight, threatening technological displacement, and murky economic prospects.
Many economists blame the disappointing performance of their discipline on the constant intervention of government in economic affairs, to the despair of predictors and policymakers alike. There is, of course, some merit to this contention. But I believe a deeper reason for the poor showing of the profession is the extreme fragility of the theoretical foundations on which economic prediction and policy both ultimately rest. At least part of the recurrent failure stems from the fact that economists conceive of the world in terms that fail to grasp its essential characteristics or that seriously misrepresent them. It is this shaky underpinning that I wish to examine before discussing a new departure in economic thinking that is the subject of the book at hand.
A good place to start is with the words that economics has imported from physics and made fashionable throughout social science: “micro” and “macro.” Microeconomics is concerned with aspects of the economy that are centered in the act of choice, allocation, decision-making. Macroeconomics is devoted to the performance of the economy as a whole, especially with regard to employment and output and inflation. This seems, on the surface, like a very convenient way of examining the economy from two different vantage points, micro yielding a worm’s eye view, macro a bird’s eye view. But what is strange is that there is no way of going from one view to the other. One would think that by opening up the worm’s eye lens one would eventually take in the entire flow of output or employment that originates in the “micro” acts of individuals or firms—but no such comprehensive view emerges, only a blur. Conversely, it would appear that by closing down the macro lens we could bring into sharp focus the individual actions that are the constituent elements of the flow of output or the rise in prices, but again …