How we got here: Adam Smith minus Karl Marx; Keynes tortured by Samuelson
September 13, 2014
from Neva Goodwin
Adam Smith, generally regarded as the begetter of modern economic theory, stressed issues of growth and distribution, based on an image of smoothly functioning markets. The pieces of Smith’s legacy that remained significant for what I will refer to as 20th century economics (though I will focus especially on the second half of the past century) were the emphasis on growth, and admiration for markets. This truncated legacy greatly reduced the emphasis on distribution, while also missing Smith’s concern that markets might not always function optimally. He especially pointed to monopolistic behavior as a problem, and supported various kinds of government intervention to keep the market on track. Ignoring these caveats, 20thcentury economists pursued the optimistic program of modeling a world in which perfect markets lead to optimum social outcomes.
The classical economists – those holding the stage approximately until Marshall’s time – also included Karl Marx, whose concerns for inequality and class conflict were shared by Smith (though they expressed themselves very differently).
Marshall’s deepest concern was with poverty, and the ways that (as he saw it) the poor were deprived of the means to develop their mental and moral capacities – what might be called, today, their human capital. Moral concerns were shunted aside in the positivism that overtook the field after Marshall’s time. What remained of classical economic thought in the 20th century development of micro-economics was Adam Smith minus Karl Marx.
What of macroeconomics? We can see early strands in the work of the physiocrats (Smith went to France to study with them) who were concerned with issues of the balance of trade between nations – concerns that Ricardo took up a little later. Marx had a special focus on the macroeconomic instability of markets and he also, along with Ricardo, Malthus, and John Stuart Mill, raised some of what continue to be the critical macroeconomic questions:
- How is the total wealth generated by a society divided between those who own the means of production and those who work for them?
- Is the existing division optimal?
- What are the forces that determine how society’s wealth will be divided?
- And: what are the goals of the economy?
None of these questions have been in the foreground of 20th century economics. Instead, in the second half of that century the field developed almost as though no one aside from Ricardo had ever thought about macro issues until Keynes came along, to prescribe how to get out of the Great Depression of the 1930s. From the point of view of those who began to call themselves neoclassical economists there were some problems with Keynes’ prescriptions. Politically, Keynes was on what came to be the losing side, in his conviction of the importance of government’s role in stabilizing economies. Methodologically as well his approach did not fit the Procrustean bed on which Paul Samuelson laid the thinkers he worked over to come up with his Principles texts. The bits that hung over the bed and had to be chopped off included a belief in the probability of market failures. The bits that were too short and had to be stretched to fit Samuelson’s passion for the tidiness and precision of mathematics were any ideas that could not easily be described in formal models.Thus, if the skeleton of 20th century microeconomics was Adam Smith minus Karl Marx, that of macroeconomics was Keynes tortured by Samuelson.
Neva Goodwin, “The human element in the new economics: a 60-year refresh for economic thinking and teaching”, real-world economics review, issue no. 68, 21 August 2014, pp. 98-118, http://www.paecon.net/PAEReview/issue68/Goodwin68.pdf
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