Customer Reviews

The Crisis of Vision in Modern Economic Thought

5 star:		(1)
4 star:		(0)
3 star:		(1)
2 star:		(0)
1 star:		(0)

 

 

The authors are harsh for today's US economists, because they have lost contact with the social reality: "the extraordinary combination of arrogance and innocence with which mainstream economics has approached the problems of a nation that had experienced twenty years of declining real wages, forty percent of whose children live in "absolute" poverty, and which endured an unprecedented erosion of health, vacation, and pension benefits. The commitment to full employment legislated in 1946 has been "honored" in these socially destructive years ... by redefining "full" employment as a higher level of unemployment."(p.6)
The solution of the authors is government intervention in the economy and a re-evaluation of the public sector, although they recognize that Keynesianism was and is not perfect: it was unable to present a coherent theory of inflation; it failed to include a concept of stagflation; and its treatment of the money supply could lead to inflation.
But in fact, the US government intervenes already heavily in the economy, but for the authors not in the right sector: defence.

This book, written in 1995, contains already the central proposition of 'The Silent Takeover' by Noreena Hertz: "On a wold wide scale, this internationalization of finance seriously limits the ability of advanced nations to carry out domestic fiscal and monetary policies that are not compatible with the "will" of a stateless world financial market." (p.120)
Their world vision was correct, but too timid: "On a still lager front, world population growth threatens to bring another billion people into existence within a generation, raising the spectre of large immigration pressures for the advanced world ... Ecological problems ... the forces of ethnic and nationalist unrest ... together with sporadic terrorism." (p.120-121)

It is evident that the above mentioned problems can only be resolved by political intervention. The proceeds of the successes of the market economy can only be redistributed or guided by political decisions, by politicians, not by, but with the help of, economists. The problem is that no international authority has enough power to impose his decisions unilaterally on national states.
Ultimately, the decisions lay in the hands of the voters. If a majority votes for a certain direction, the political authorities have to follow, otherwise they will loose their mandate.
This is a thought provoking book.

The two coauthors,Heilbroner and Milberg,understand,in very,very general terms,what Keynes's conclusion was in the General Theory(GT;1936)-due to the extreme difficulty of making optimal decisions about the size and quality of the capital stock to invest in and maintain in the face of irregular technological change over time under conditions of uncertainty(Daniel Ellsberg's ambiguity),capitalist societies will most likely have suboptimal amounts of private and public capital goods(plants,factories,infrastructure,etc.).This insufficient spending on long run investment projects leads to involuntary unemployment.This is as far as Heilbroner and Milberg can get.Due to their very limited mathematical capabilities,they completely overlook the formal technical analysis provided by Keynes in chapters 19,20,and 21 that proves his case.On p.262 in chapter 19 of the GT,Keynes specifies the major analytic conclusion of his theory-Unless the mpc(marginal propensity to consume)=1,involuntary unemployment will result.If the capital stock is at suboptimal levels,the condition then becomes mpc+mpi=1,where mpi is the marginal propensity to invest.This condition is the missing equation in Pigou's macroscopic model that Keynes discusses in the appendix to chapter 19 of the GT.In both chapter 20 and chapter 21,Keynes derives the following optimality condition ,linking both the commodity market and the labor market-w/p=mpl/(mpc+mpi),where mpl is the marginal product of labor derived from an aggregated neoclassical production function(p.283,ft. 1 and 2).Unless mpc+mpi equal 1,it is impossible for labor,in the aggregate,to reduce unemployment by cutting the money wage.Involuntary unemployment will automatically exist.The reason why mpc+mpi will be < 1 is due to the unstable,unpredictable,volatile nature of investment spending.This is ultimately due to the uncertainty or ambiguity of the information base faced by businessmen who are trying to figure out the correct amount of capital equipment to hold in the future in order to make an economic profit in the present by selling the output they have produced with that equipment in the past.Heilbroner and Milberg completely overlook Keynes's analysis although they understand the vision.