A history of economic thought from Keynes to the present

1. A history of economic thought from Keynes to the present BERNARD CHAVANCE Professor University Paris Diderot ABIK, JUNE 2010

2. Why study the history of economic thought? • Political economy or economics as a social science • The cumulative view of evolution: a progressive movement towards a more perfect of understanding • The competitive view: different conceptual foundations about similar economic realities • The contextual view: economic theories determined by the historical, national and international background

3. A controversial branch of knowledge • A specific pattern in economics : a plurality of divergent schools or authors in different periods • Accompanied by the dominance of a given current of thought : mainstream, or orthodoxy • And the presence of dissidents, heretics or heterodoxy • Example (schematized) : • 19th century : dominance of the English classical school, heterodoxy : Marx • 20th century: dominance of the neoclassical school, heterodoxy : Veblen, Keynes

4. Cycles in intellectual influence • Alternating periods of influence and disregard, or oblivion and rediscovery • Malthus and Keynes • Schumpeter : wilderness years, and comeback in the 1980s • Hayek : influence 1930s-1940s, marginalization 1950s-1970s, comeback in the 1980s-1990s • Keynes : authority in the 1950s-1960s, dismissal in the 1970s-1990s; comeback through the present world economic crisis?

5. A short sketch of economists and schools before Keynes MERCANTILISM CLASSICAL SCHOOL MARX MARGINALIST REVOLUTION

6. The « mercantile system » • Mercantilism, 16th-18th centuries • The first dominant school, in a period of capitalist emergence • The State or the sovereign should accumulate wealth, especially money (precious metals) • The balance of trade should be kept positive • The state should use legislation and protective policy to augment the country’s wealth

7. The classical school • Period of the extension of the industrial revolution • Adam Smith, The Wealth of Nations, 1776 • David Ricardo, On the principles of political economy and taxation, 1817 • John Stuart Mill, Principles of political economy, 1848

8. Smith (1723-1790)

9. David Ricardo (1772-1823)

10. John Stuart Mill (1806-1873)

11. Classical political economy • The problem of wealth production and distribution • Labour-theory of value • Three great classes based on property : workers, capitalists, land owners • Three types of income : wages, profit, rent • The accumulation of capital as the main source of increased wealth • The problem of long-term growth : avoiding the stationary state

12. Economic liberalism • A criticism of the « mercantile system » • Opposition to the Corn laws limiting imports of corn in England, and to the Poor laws protecting the indigent people • A defense of the self-regulating character of the system of exchange or market economy • An apology of free trade, as benefiting to all partners of exchange (Ricardo’s comparative costs argument) • A strict limitation of the role of the state in the economy

13. The invisible hand : a providentialprocess(Smith, 1776) • Individual self-interest as the main motivation: « It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. » • About the economic agent: « By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. » • A criticism of state intervention: «  Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. » (Smith, 1776)

14. Marx and the critique of political economy • A follower and a critic of the classical school. Das Kapital (1867) • The role of « critique »: unveiling essential relations hidden beneath superficial manifestations, and explaining the cause of distorted appearances • Capitalism as a combination of commodity production and wage-labour system • Two principal contradictions : labour vs capital, and competition of capitals

15. A system based on perpetual change • « The bourgeoisie cannot exist without constantly revolutionizing the instruments of production, and thereby the relations of production, and with them the whole relations of society. » • « Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. All fixed, fast frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. » (Manifesto, 1848)

16. Marx (1818-1883)

17. Capital as a moving contradiction • Value and surplus value: a theory of exploitation • Surplus value produced by labour as the single source of non-wage incomes (profit, interest, rent) • Falling rate of profit : the main tendency and counter-tendencies • Economic crises as the expression and the temporary solution of internal contradictions of the system • The capitalist mode of production condemned to eventually disappear

18. The marginalist revolution • A major shift in economic theory (1870s-1890s) • Labour theory of value is superseded by marginal utility theory of value (objective approach turns subjective) • Class analysis is discarded, the individual becomes the basic reference • The concept of « equilibrium » is central • Partial equilibrium (Marshall) • General equilibrium (Walras) • A theory of exchange (the « market ») • An approach based on « efficiency », the optimum concept (Pareto)

19. Léon Walras (1834-1910)

20. The market vision of the world • « (T)he whole world may be looked upon as a vast general market made up of diverse special markets » (Walras, 1874) • An early formulation of the notion of a « market economy », or a « markets economy »

21. Alfred Marshall (1842-1924)

22. Shift from classical to neoclassical school • « Economics » supersedes political economy • « Neoclassical » : a critical term introduced by Veblen (1900) to stress the disputable continuities with the classics, i.e. a teleological approach and an implicit normative stance • … but a questionable label, taking into account the important breaks with the classics • … a term that will eventually be positively adopted by « neoclassical » economists themselves in the second half of the 20th century (Hicks, Samuelson)

23. Marshallian economics at the beginning of the 20th century • Principles of economics (1890, 8 editions) • The « partial equilibrium » method: isolating an agent or industry, analysing its behaviour under the ceteris paribus clause, and allowing gradually fixed elements of the environment to change • Supply and demand curves : the marshallian cross, determination of equilibrium price and quantity • Increasing or decreasing returns to scale • A defense of free entreprise, but admission of a limited state intervention for promoting social welfare

24. Marshallian cross