Rethinking economics in the backwater

Almost 1000 people attended the three-day Rethinking Economics meeting in New York, the follow-up to the recent RE meeting in London (see my post Rethinking Economics is an organisation set up by mainly postgraduate economics students concerned at the failure of mainstream economics to grasp the reasons behind the global financial collapse and its failure to open up the curriculum in university economics departments to economic thinking beyond mainstream neoclassical or ‘orthodox’ Keynesian ideas.

There seems to a huge interest among young economics students and academic economists to break with the ‘closed shop’ of mainstream thinking. And the New York chapter of Rethinking Economics was able to get some ‘big hitters’ from mainstream and heterodox economics to make presentations or join discussion panels. The whole thing was live streamed across the globe.

Watching online, we were greeted with a panel composed of leading Keynesian guru and Nobel prize winner, Paul Krugman; Willem Buiter, now chief economist at Citibank and former professor at the LSE; and James Galbraith, son of the legendary JK Galbraith and one of the few heterodox professors of economics in a university post.

The eminent three were asked why mainstream economic theory failed to forecast the global crisis and why it had struggled to explain it. Krugman said he held to the view that mainstream economic theory with its models of markets, representative economic agents and equilibrium analysis was still useful, but was inadequate without recognising that economic reality was lot ‘messier’.

Willem Buiter seemed to go further when he reckoned that what was wrong with mainstream economics was that it assumed equilibrium from the start and then added in ‘frictions’, ‘instability’ or ‘imperfection’. It ought to start by assuming ‘chaos’ and then build in content and form to develop useful theory. This seemed so vague as to be useless. But to be fair, this was panel discussion without the chance to develop arguments in detail.

In a recent post on his New York Times blog, Krugman explained his position on models and theory better
The famous Keynesian model of the macro economy is the IS-LM model (investment=savings on one side and liquidity preference and money supply on the other). The IS–LM model attempts to explain the relationship between interest rates and real output. The intersection of the IS and LM curves is the ‘general equilibrium’ where there is simultaneous equilibrium in both money and ‘real’ markets. In this model, the equilibrium is not met (and crises occur) if savings exceed investment causing a lack of effective demand and/or liquidity preference exceeds money supply and causes a rise in the price of money (interest rates) that makes equilibrium growth unviable.

Many heterodox or post-Keynesian economists deny this was Keynes’ view of a monetary economy and that he was much more concerned with instability, irrational expectations and uncertainty as the explanation of financial crises. Krugman argues that Keynes may have been interested in uncertainty as a cause of financial instability but his real contribution was to show that a capitalist economy can establish an equilibrium where underemployment is permanently established and to restore full employment requires intervention to lower interest rates and/or boost investment. That is the value of the IS-LM curve model. All else is too vague.

Krugman’s position at Rethinking Economics has come in for some strong criticism by ‘post-Keynesians’ like Philip Pilkington and Lars Syll ( and

It has become an interminable debate between orthodox Keynesians and neoclassical economics on whether there has to be some ‘exogenous’ intervention to get going a capitalist economy that has slipped into permanent stagnation or lack of effective demand; or whether the market can right itself through changes in wages and prices of assets.

As James Galbraith put it in his contribution, mainstream economics is divided between ‘freshwater economists’ (those based in Chicago like Lucas, Fama (see my paper The causes of the Great Recession) etc who reckon that a ‘free market’ can solve all) and ‘saltwater economists’ (those based in the East Coast universities like Yale, MIT, Harvard and Columbia who follow Keynes in reckoning the capitalist economy needs the help of fiscal and monetary authorities to put a modern economy in depression back on an ‘even keel’).

Galbraith said he was in neither camp. He was part of ‘backwater economics’, those economists of the heterodox tradition that saw modern capitalism as full of inherent flaws that required institutional change and radical surgery to deal with recurrent crises and rising inequality, for example. It was backwater economics, because it was ignored or excluded by the mainstream camps. There were hardly any heterodox economists in university posts anywhere and yet it was some of these economists who were the only ones to predict the financial crash and ensuing Great Recession. Galbraith referred and pointed to Steve Keen in the audience who had predicted the crisis (see my post, subsequently lost his job in Western Australia and only just been appointed head of economics at the radical heterodox University of Kingston, London.

Galbraith wanted economics to return to a study of economic history and institutions and not get bogged down in economic models and maths without any political economy. That brings me to Marxian economics. Marx’s economics is ‘political economy’, or to be more exact, Marx made a critique of political economy, or the ‘mainstream economics’ of the early 19th century. Marx was not afraid of, or opposed to, using models or maths to explain the laws of motion of capitalism. But the main task of Capital and Marx’s other economic writings was to expose the flaws in the economic theory of the great ‘classical’ economists like Adam Smith and David Ricardo who had tried to analyse the nature of the capitalist mode of production objectively, if from the point of view of the rising capitalist class. Marx also aimed at exposing the apologetic ‘vulgar’ economists like Malthus and others who just wanted to propagandise the necessary role of the capitalist class and the market economy.

This was part of the theme Professor Richard Wolff ( presented in the only presentation on Marxian economics in three days at Rethinking Economics – as in London, the New York conference was dominated by either orthodox Keynesians or ‘post-Keynesian’ speakers. Marxist economics remains the real backwater.

In an excellent account, Wolff explained that Marx made a critique of the ideas of Smith and Ricardo, developing their labour theory of value into a theory of exploitation that explained why capitalism, in overthrowing feudalism and supposedly establishing ‘liberty, equality and fraternity’ (to use the slogan of the French revolution), did no such thing. One class system of exploitation had been replaced by another, only the mode of production and social exploitation had changed.

For Wolff, this was the decisive insight of Marxian economics that had to be denied by mainstream economics. From the 1870s onwards, an honest objective critique of capitalist flaws was replaced by apologia. And a counterrevolution in economics began, with the labour theory of value and exploitation dismissed and ridiculed (and relegated to the backwater), to be replaced by ‘utility’ theory, marginal productivity and equilibrium markets. Austrian economist Bohm Bawerk did the demolition job on Marxist theory and Jevons, Walras and others developed the ‘neoclassical’ propositions and theory that still define the mainstream (including Keynesianism). For an excellent account of the major differences between Marxian economics and classical and neoclassical economics, see Alan Freeman’s paper (Freeman on Marx’s theory). And also read Wolff and Resnick account in their book on comparative economic theories (

As Wolff said, there is no real alternative to economics in universities that does not assume the capitalist mode of production is here to stay. The split in mainstream economics in the 1930s was product of the Great Depression and the rise of a labour movement demanding change. Thus Keynesian economics reared its theoretical head in recognising that capitalism had serious flaws (at a macro level) that must be addressed by intervention (even extreme interference in markets on occasion) in order to save capitalism from itself. Such an approach has never been fully adopted by the majority of mainstream economics and after the 1970s , Keynesian ‘intervention economics’ was dropped in place of a return to free markets, particularly in labour, with globalisation and financial deregulation.

There was a certain naivety in the work of Rethinking Economics that things can change. Marxian economics, let alone heterodox economics, will remain a ‘backwater’ in academic institutions because these things are not decided by the strength of ideas (contrary to Keynes’ view) but the economic and social power of the ruling class.

Paul Krugman has commented that “hardly anyone predicted the 2008 crisis… but more damning was the widespread conviction among economists that such a crisis couldn’t happen. Underlying this complacency was the dominance of an idealized vision of capitalism, in which individuals are always rational and markets always function perfectly.”

But it was not just the failings of mainstream theory; there was a deliberate ideological need to defend capitalism and the status quo: “Clearly, economics as a discipline went badly astray… But the failings of economics were greatly aggravated by the sins of economists, who far too often let partisanship or personal self-aggrandizement trump their professionalism. Last but not least, economic policy makers systematically chose to hear only what they wanted to hear. And it is this multilevel failure — not the inadequacy of economics alone — that accounts for the terrible performance of Western economies since 2008.”

As one tweeter on the meeting commented, “arguing with economists about ‘rethinking economics’ is like arguing for abortion with the Pope in front of the College of Cardinals”.

7 thoughts on “Rethinking economics in the backwater

  1. They won’t give up their private property to be run by its employees or let their production set by the needs of society at large. Not without use some sort of revolutionary struggle.

  2. I read Alan’s article and thought it was interesting that the premise for the TSSI was an acceptance of Steeman’s physicalist critique of the transformation problem. I think that’s where they all go wrong.
    I stumbled across this very interesting book by Howard Nicholas on Marx’s theory of value and price, which appears to sort out most of the problems.

    Click to access nicholas11.pdf

  3. “Clearly, economics as a discipline went badly astray… But the failings of economics were greatly aggravated by the sins of economists, who far too often let partisanship or personal self-aggrandizement trump their professionalism. Last but not least, economic policy makers systematically chose to hear only what they wanted to hear. And it is this multilevel failure — not the inadequacy of economics alone — that accounts for the terrible performance of Western economies since 2008.”

    Without denying that Paul Krugman is motivated to defend capitalism, I think that was more a jibe at the Post-Keynesians, including Galbraith and Keen, with whom Krugman had several not-so-friendly exchanges.

    He repeated the same idea, much more clearly, in his latest op-ed:

    “You might say that this is just human nature, and it’s true that while the most shocking intellectual malfeasance has come from conservative economists, some economists on the left have also seemed more interested in defending their turf and sniping at professional rivals than in getting it right.”

    By the way, the same defence of capitalism that one finds in Krugman is by no means uncommon among most Post-Keynesians.

  4. Is the audio or vidoe of Richard Wolff’s presentation available? I tried to google it but couldn’t find anything.

  5. One should not exaggerate the “counterrevolution”. Marx also said that only a commodity with a use value can have value. Jevons followed also the labour theory of value. Utility theory explains the amounts of goods demanded on the basis of a restriction defined by available labour. From the demand side you have the utility theory, from the supply side you have the labour value theory. Marx also had marginalist ideas saying that in a recession values are smaller, because only the more productive firms operate whereas in a boom values are larger because less efficient firms get a chance to operate. According to modern economics prices are still proportional to labour values (which is a problem for Marxists because according to Marx production prices should rule which usually differ from labour values). It was the (non-Marxist) Federal Statistical Office of Germany which published in 2010, that prices in Germany follow the labour theory of value (unfortunately for Marxists, not the prices of production theory, see also Machover and Farjoun Laws of Chaos). In the seventies bourgeois economists like Paul Samuelson and his German assistant Carl Christian von Weizsäcker proved that prices of prodiction can be interpreted as labour values (in their brochure “Labour Theory of Value for Marxists” 😉
    The new insight of Marx was to introduce labour power as an additional commodity, the value of which is defined by the labour theory of value (cf. Freeman). This element is missing in bourgeois labour theories of value.

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