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LECTURE 8: A HISTORY OF ECONOMIC THOUGHT FROM KEYNES TO THE PRESENT
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
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
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?
MERCANTILISM
CLASSICAL SCHOOL
MARX
MARGINALIST REVOLUTION
A short sketch of economists and schools before Keynes
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
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
Smith (1723-1790)
David Ricardo (1772-1823)
John Stuart Mill (1806-1873)
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
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
The invisible hand : a providential process (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)
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
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)
Marx (1818-1883)
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
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)
Léon Walras (1834-1910)
The market vision of the world
« The 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 »
Alfred Marshall (1842-1924)
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)
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
Marshallian cross
Keynesianism
Due to John Meynard Keynes He explained the economic crisis in the
USA from 1929 He concluded that the crisis was caused
due to demand and not supply He generally placed more emphasis on
the demand side