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 Nobel Prize but rather The Sveriges Riksbank Prize in Economic Sciences. It was introduced later than the Nobel prizes, at the instigation of the Swedish central bank, and was not specified in Alfred Nobel’s will.

The date the economics prize was introduced, 1969, is interesting in relation to the prize’s legitimating function in the neoliberal era. In an earlier era, 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 fiscal and monetary measures conducive to strong employment outcomes in the immediate postwar period.

But by the late 1960s, capitalists were getting antsy and labor increasingly strident. The capitalists sought a change in political strategy – later to be known as neoliberalism – and needed, if possible, an economic theory to legitimize it, to make it appear as though the adoption of neoliberal policies – privatization, deregulation, the decimation of unions, attacks on workers’ pay and conditions, austerity, etc. – was motivated by valid theoretical considerations and in everyone’s interests, not just corporate interests. The obvious candidate was neoclassical economics, which originally emerged in the 1870s at a similar moment of strategic significance, when the legitimacy of capitalism was being challenged by Marxism and Ricardian Socialism. The capitalists needed apologists with some respectability and it was natural to expect the priestly robe to fit the neoclassical frame nice and snugly. Needless to say, not all neoclassical economics is neoliberal, but neoliberalism was easy to situate within the neoclassical paradigm.

Inconveniently for capitalists, 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 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 toward full employment; and (ii) Say’s Law (that “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 global corporations. 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. Non-neoclassical 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, in time, many younger neoclassical economists) would simply suppose the dissenting economists must be marginalized for 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 their theory in the service of global conglomerates. 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, efforts to inculcate younger generations into the neoliberal paradigm were unleashed in their full intensity both within the university departments and outside, the army of willing apologists freed from the shackles of analytical rigor and intellectual honesty. The apologists 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.

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 by economic theory – the economic theory of Nobel Laureates. 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.