Saturday, November 1, 2014

John Bellamy Foster, and Michael D. Yates — Piketty and the Crisis of Neoclassical Economics

Not since the Great Depression of the 1930s has it been so apparent that the core capitalist economies are experiencing secular stagnation, characterized by slow growth, rising unemployment and underemployment, and idle productive capacity. Consequently, mainstream economics is finally beginning to recognize the economic stagnation tendency that has long been a focus in these pages, although it has yet to develop a coherent analysis of the phenomenon.1 Accompanying the long-term decline in the growth trend has been an extraordinary increase in economic inequality, which one of us labeled “The Great Inequality,” and which has recently been dramatized by the publication of French economist Thomas Piketty’s Capital in the Twenty-First Century.2 Taken together, these two realities of deepening stagnation and growing inequality have created a severe crisis for orthodox (or neoclassical) economics. 

To understand the nature of this crisis of received economics it is necessary to look at the two principal bulwarks of neoclassical theory, which were originally erected in response to socialist critics. The first is the notion that a freely competitive capitalist economy left to itself generates full employment, indicating that unemployment is the product of various frictions, imperfections, or government interference. The second is the related proposition that income and wealth inequality are determined by the “marginal productivity” (or relative contributions to output) of the various factors of production, chiefly capital and labor—a logic that is extended to the contributions of individuals themselves. The renowned post-Second World War national income statistician, Simon Kuznets, in his famous Kuznets Curve, even argued that there was a tendency in developed capitalist economies towards a decrease in inequality, due to the effects of modernization, including enhanced educational opportunities.3

Contrast these propositions to the reality of the mature capitalist economies today. Far from a full-employment equilibrium, what we see rather is a long-term tendency to economic stagnation. Moreover, this reality describes all of the developed capitalist economies and can be seen in a trend going back forty years, or indeed longer.4 Over roughly the same period, income and wealth levels, rather than converging, have diverged sharply—a divergence that cannot be attributed to differences in education and skill, nor to the contributions of capital relative to labor.5 In short, both of the principal justifications for the system provided by neoclassical economics have collapsed before our eyes.6
Monthly Review
Piketty and the Crisis of Neoclassical Economics

1 comment:

Matt Franko said...

What if the economy was closed?