It is remarkable just how wrong neoclassical economists proved to be concerning the “Great Moderation”. By their logic, the global financial crisis was never a possibility, and even in retrospect can’t possibly have happened. Now that it has, the calls for a return to austerity from the neoliberal wing of the still predominantly neoclassical profession are already animated and shrill despite an absence of any sign of a sustainable recovery in global output and employment. It raises the question: Is there anyone in the world less deserving of a Nobel Prize than an economist?

Strictly speaking, the Nobel Prize in economics is not a real Nobel Prize. It was introduced later than the other prizes, at the instigation of the Swedish central bank, and was not specified in Alfred Nobel’s will. It is, in practice, an award for orthodox economics, and primarily a propaganda exercise (similar to the Nobel Peace Prize, which frequently goes to warmongers of various stripes). The fact the prize was introduced at the behest of a central bank tells us all we need to know about its class origins and purpose.

And I saw a beast coming out of the sea. He had ten horns and seven heads, with ten crowns on his horns, and on each head a blasphemous name. The beast I saw resembled a leopard, but had feet like those of a bear and a mouth like that of a lion. The dragon gave the beast his power and his throne and great authority. One of the heads of the beast seemed to have had a fatal wound, but the fatal wound had been healed. (Revelation 13:1-3)

The date the economics prize was introduced, 1969, is interesting in relation to the prize’s propaganda function. Capitalism had suffered a seemingly fatal wound – the Great Depression, two world wars, revolution in Russia – but the wound had healed thanks to class compromise between capital and labor that, among other things, involved governments adopting deficit expenditures and an employer-as-last-resort function to maintain close to full employment in the immediate postwar period.

But by the late 1960s, capitalists were getting antsy and labor increasingly strident. The capitalists sought a change in class-war tactic – later to be known as neoliberalism – and needed, if possible, a theory to legitimize it, to make it appear as though the adoption of neoliberal policies – deregulation, union smashing, attacks on workers’ pay and conditions, privatization, austerity, etc. – was motivated by valid theoretical considerations and in everyone’s interests, not just capital’s. The obvious candidate was neoclassical economics, which originally emerged in the 1870s at a similar moment of need, when the legitimacy of capitalism was being undermined by Marxism and Ricardian Socialism. The capitalists needed propagandists with some respectability and it was natural to expect the apologetic robe to fit the neoclassical frame nice and snugly. Needless to say, not all neoclassical economists were or are neoliberal, but neoliberalism was easy to embed vwithin the broader neoclassical paradigm.

Then I saw another beast, coming out of the earth. He had two horns like a lamb, but he spoke like a dragon. He exercised all the authority of the first beast on his behalf, and made the earth and its inhabitants worship the first beast, whose fatal wound had been healed. (Revelation 13: 11-12)

Unfortunately for capital, neoclassical economic theory had just suffered something of a wound itself in the capital debates. The wound was noticeable and gaping when, in 1966, leading neoclassical economist Paul Samuelson admitted:

The phenomenon of switching back at a very low interest rate to a set of techniques that had seemed viable only at a very high interest rate involves more than esoteric difficulties. It shows that the simple tale told by Jevons, Böhm-Bawerk, Wicksell and other neoclassical writers — alleging that, as the interest rate falls in consequence of abstention from present consumption in favour of future, technology must become in some sense more ’roundabout,’ more ‘mechanized’ and ‘more productive’ — cannot be universally valid. (“A Summing Up”, Quarterly Journal of Economics vol. 80, 1966, p. 568. This and the other quotes reproduced below are taken from the Wikipedia entry.)

In this passage, Samuelson concedes that it is not valid to suppose, in general, that a reduction in interest rates will induce an increase in the demand for the factor ‘capital’. Yet, it was just such a well-behaved ‘demand for capital’ function that neoclassical economists had been relying upon to support their claims that: (i) a market economy automatically tends towards full employment; and (ii) Say’s Law (that “saving calls forth investment” and “supply creates its own demand”) holds in the long run. And these were just the sorts of claims that could lend weight to the idea that neoliberal policies were in the interests of everybody, not just capital. Pity the claims had just been shown to be without sound foundation.

Not to worry. Four years after making his admission of defeat in the Capital Debates, Samuelson was awarded the “Nobel Prize”, and the Capital Debates were never again discussed in Polite Circles. Heterodox economists were shut out of the mainstream debate, not because their criticisms are incorrect or yet to be established. They were shut out so that they would be shut up. When the aim is to hide the truth, anyone who tells the truth needs to be discredited, and since the dissenting economists couldn’t be discredited on theoretical and logical grounds, they had to be marginalized so that anyone not aware of the actual theoretical status of neoclassical economics (including many younger neoclassical economists) would simply suppose the dissenting economists must be marginalized for a good reason. After all, how many of them ever got a “Nobel Prize”?

Participants in the Capital Debates knew better, of course. For instance, Edwin Burmeister writes:

It is important, for the record, to recognize that key participants in the debate openly admitted their mistakes. Samuelson’s seventh edition of Economics was purged of errors. Levhari and Samuelson published a paper which began, ‘We wish to make it clear for the record that the nonreswitching theorem associated with us is definitely false. We are grateful to Dr. Pasinetti…’ (Levhari and Samuelson 1966). Leland Yeager and I jointly published a note acknowledging his earlier error and attempting to resolve the conflict between our theoretical perspectives. (Burmeister and Yeager, 1978). However, the damage had been done, and Cambridge, UK, ‘declared victory’: Levhari was wrong, Samuelson was wrong, Solow was wrong, MIT was wrong and therefore neoclassical economics was wrong. As a result there are some groups of economists who have abandoned neoclassical economics for their own refinements of classical economics. In the United States, on the other hand, mainstream economics goes on as if the controversy had never occurred. Macroeconomics textbooks discuss ‘capital’ as if it were a well-defined concept — which it is not, except in a very special one-capital-good world (or under other unrealistically restrictive conditions). The problems of heterogeneous capital goods have also been ignored in the ‘rational expectations revolution’ and in virtually all econometric work. (Burmeister, 2000, “The Capital Theory Controversy”, in Critical Essays on Piero Sraffa’s Legacy in Economics.)

As far as many non-neoclassical economists are concerned, the problems are not confined to neoclassical macroeconomics. For instance, Marc Lavoie argues:

Capital reversing renders meaningless the neoclassical concepts of input substitution and capital scarcity or labor scarcity. It puts in jeopardy the neoclassical theory of capital and the notion of input demand curves, both at the economy and industry levels. It also puts in jeopardy the neoclassical theories of output and employment determination, as well as Wicksellian monetary theories, since they are all deprived of stability. The consequences for neoclassical analysis are thus quite devastating. It is usually asserted that only aggregate neoclassical theory of the textbook variety — and hence macroeconomic theory, based on aggregate production functions — is affected by capital reversing. It has been pointed out, however, that when neoclassical general equilibrium models are extended to long-run equilibria, stability proofs require the exclusion of capital reversing (Schefold 1997). In that sense, all neoclassical production models would be affected by capital reversing. (Lavoie, 2000, “Capital Reversing”, Encyclopedia of Political Economy.)

In a similar vein, Christian Gehrke and Christian Lager conclude:

These findings destroy, for example, the general validity of Heckscher-Ohlin-Samuelson international trade theory (as authors such as Sergio Parrinello, Stanley Metcalfe, Ian Steedman, and Lynn Mainwaring have demonstrated), of the Hicksian neutrality of technical progress concept (as Steedman has shown), of neoclassical tax incidence theory (as Steedman and Metcalfe have shown), and of the Pigouvian taxation theory applied in environmental economics (as Gehrke and Lager have shown). (Gehrke and Lager, 2000, “Sraffian Political Economy”, Encyclopedia of Political Economy.)

These last three quotes are all relatively recent (in books or encyclopedias of economic thought published in 2000). There has been no reversal of these conclusions in the period since the Capital Debates. The conclusions are simply ignored, and neoclassical economists of a neoliberal persuasion go on their merry way, spinning propaganda in the service of capitalists and capitalist governments. Most years, one or more of them gets a Prize in Economics from a Nobel committee to help reassert neoliberal legitimacy.

The introduction of the Prize in Economics immediately preceded and lent credence to the mounting of the neoliberal policy onslaught. With dissenting voices eradicated from the mainstream journals and more prestigious university economics departments, the brainwashing efforts were unleashed in their full intensity both within the university departments and outside, the army of willing propagandists finally freed from the shackles of analytical rigor and intellectual honesty. The propagandists were everywhere, infesting the IMF, the World Bank, Treasuries and central banks, every powerful policy-formulating institution; and by virtue of their positions in these policy-making institutions as well as in the most prestigious universities, the propagandists heavily influenced the nature of the economic information disseminated through the media.

Because of the signs he was given power to do on behalf of the first beast, he deceived the inhabitants of the earth. He ordered them to set up an image in honour of the beast who was wounded by the sword and yet lived. He was given power to give breath to the image of the first beast, so that it could speak and cause all who refused to worship the image to be killed. He also forced everyone, small and great, rich and poor, free and slave, to receive a mark on his right hand or on his forehead, so that no one could buy or sell unless he had the mark, which is the name of the beast or the number of his name. (Revelation 13: 14-16)

Thanks to the efforts of neoliberal economists, a ruthless onslaught on the living conditions of general populations the world over gained legitimacy: the legitimacy that comes from being backed (supposedly) by orthodox economic theory – the economic theory of “Nobel Prize” winners. Within the space of a couple of decades, neoliberalism had conquered the globe and given us what we have today. Only one approach to economic policy was permissible, and to resist it was to risk being economically penalized, trade restricted and diplomatically ostracized. Poorer countries that tried to stand in the way of the policy drive soon lived to regret it, and many who protested were met with brutality.

The whole world was astonished and followed the beast. Men worshiped the dragon because he had given authority to the beast, and they also worshiped the beast and asked, “Who is like the beast? Who can make war against him?” The beast was given a mouth to utter proud words and blasphemies and to exercise his authority for forty-two months. He opened his mouth to blaspheme God, and to slander his name and his dwelling place and those who live in heaven. He was given power to make war against the saints and to conquer them. And he was given authority over every tribe, people, language and nation. All inhabitants of the earth will worship the beast—all whose names have not been written in the book of life belonging to the Lamb that was slain from the creation of the world. (Revelation 13: 3-8)

Addendum (October 2014)

For a non-polemical and highly informative explanation of the capital debates and their implications, readers may wish to refer to the following excellent post by Matias Vernengo:

The capital debates: A brief introduction

Other related posts include:

Vernengo on Keynes vs Neoclassical Synthesis
More on Keynes vs the Neoclassical Synthesis

2 thoughts on “Nobel-nomics

  1. This is very interesting. What do you think of the Prize given to Hayek? Also, are Stiglitz and Krugman neoclassical – I thought they were Keynesian – or are just palatable to the Nobel committee?

  2. Thanks for your comments. The Austrians used to be considered part of the neoclassical mainstream. Notice in the passage from ‘A Summing Up’ that Samuelson includes Bohm-Bawerk as one of the “neoclassical” economists who had told a “simple tale” regarding “roundaboutness”.

    I tend to think of Stiglitz and Krugman as neoclassical because of their marginalism. By the same token, I don’t think their self-description as Keynesian is as big a stretch as in the case of the New Keynesians. On policy, there is some agreement under current circumstances (though not on QE), but this is very much considered “short run” for the mainstream. In the “long run”, there is no demand constraint for these economists. Persistent involuntary unemployment is the result of excessive real interest rates and real wages in their view (e.g. efficiency wages), not deficient demand. Even in the short run, although they acknowledge demand deficiency, the way monetary and fiscal policies boost demand in their analyses is really by causing inflation that, for given nominal interest rates and money-wage contracts, reduces real interest rates and real wages, and this is supposed to induce private investment and employment.

    I think Keynesianism requires a break from marginalism and neoclassical microfoundations, as has been the case with Post Keynesianism. The capital debates show partly why such a break was necessary. Krugman and Stiglitz seem more in the neoclassical-synthesis Keynesian tradition (as was Samuelson).

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