Pathways for Transformative Economics and Politics

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Evolution and Revolution in the Field of Economics

by James K. Galbraith

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This article forms part of Rubric 7
Evolution and Revolution in the Field of Economics

In his May 2024 keynote at an international conference in memory of Luigi Pasinetti held at the Accademia Nazionale dei Lincei in Rome, Professor James Galbraith considers the revolutionary work of Luigi Pasinetti and how far the field of economics has yet to go. By connecting Pasinetti's work to that of his predecessors (e.g., Keynes, Commons, Veblen, and Robinson), Galbraith emphasizes why mainstream theory is not yet grounded in scientific inquiry or principles. He insists that, far from patching up the flaws of neoclassical economics, it is time to complete the Keynesian revolution by developing a biophysical analytical framework that incorporates Pasinetti's contributions to our understanding of time, money and distribution.

Listen to his full presentation here

Read the transcription




As I listened to Professor Roselli, my first instinct was that perhaps it was necessary to begin by apologizing for my nationality. But then it occurred to me to remind you that none of the originators of neoclassical economics were actually American: not Walras, not Menger, not Jevons, not Marshall, certainly not Frank Hahn. The Americans only came in in a second and derivative generation after our institutions were overtaken, and there was, in a preexisting American tradition, an economics which one can trace back to Thorstein Veblen, John R. Commons, and a certain emigrant from Canada, whose name family modesty precludes my mentioning here. That was, I think, very much in line with the insights of Keynes and Luigi Pasinetti. 


Keynes and Revolutionary Economics

In the closing pages of Keynes and the Cambridge Keynesians, Pasinetti summarizes his vision of the structural dynamics of a monetary production economy, a lifelong effort to advance a revolution not fully achieved and indeed overwhelmed in his lifetime by a savage counter-revolution (detailed meticulously, so far as Cambridge was concerned, in recent work by Ashwani Saith) and undermined, as Pasinetti acknowledges, by infighting and failures of strategic and tactical vision amongst the revolutionaries themselves. But looking back, one may argue that the revolutionary conditions of the 1930s had disappeared in the 1950s and 1960s, clearing a path for complacency and neoclassical dogma, both simplifying and obscurantist: perfect competition, constant returns, general equilibrium, marginal productivity, money neutrality, rational expectations, not to mention Solow’s growth theory and the refusal to acknowledge the capital critique – and at the policy level, the Washington Consensus, balanced budgets, tight money, privatization, deregulation, free trade, open capital markets. For obvious reasons, the failure of this bizarre confection is now apparent, the paradigm is frayed; it is fragmented, as has already been observed, into experimental and behavioral economics (but also above all, what I would describe as small-bore empirical econometrics, statistical analysis). 

This is where you come in with economics or what economists do. And we are back in a proto-revolutionary setting. The revolution may therefore perhaps now resume and our project here, I would urge, is not merely archeological. The question before us is what direction should it take? Pasinetti depicts the Cambridge ethos as having operated at two levels. One of them is purely theoretical. It is represented, above all, by Sraffa and the other is institutional – represented, mostly I would say by Nicky Kaldor – Pure Economics and Political Economy, if you like, with Keynes (almost alone or certainly in a preeminent position) operating equally at both levels. But Pasinetti also cites Schumpeter in calling for a unifying vision: something that can make sense of the whole picture and convey it practically at a glance to the uninitiated. For Schumpeter, as for Veblen, this was evolution: Darwin’s natural selection, economics as process rather than result, materialism over teleology, the wrenching of economics from 18th century stasis to the change and turmoil of 19th century science. In the 20th century, there was a return to a kind of managed stasis, at least for a time: growth theory, again, the neoclassical synthesis. 

And so, since this stasis has now begun – in fact it’s an advanced state of dissolution – this is a good starting point even for us. But even within the guidelines laid down by Pasinetti, nine points have already been articulated, we can go further. And I want to just quote a few lines from Keynes and the Cambridge Keynesians. He writes, “it is precisely here that one reaches the crucial point. Which other framework of reference can we look for? Traditional theory does not provide another one. It leaves us in the wilderness at a complete loss. To solve the riddle one must really stop patching up, one must genuinely go back to Keynes’s initial exhortation for a really radical change – for a genuine break away from the reductionist constraints of neoclassical economics. Time has come to sail widely and freely beyond.” But where? 


Economics, Time, and Space

Long ago, at the suggestion of Robert Skidelsky, I argued that Keynes’s General Theory was crafted in explicit analogy to Einstein: monetary production, space time. Effective demand is relative to the curvature of space in the presence of massive objects. The integration of macro and micro is akin to John Archibald Wheeler’s dictum that matter tells space how to curve and space tells matter where to go. I still find this a relatively easy and effective way to introduce the general theory to undergraduates who have not yet had common sense and a vision of the wider world beaten out of them by courses in neoclassical economics. But it remains to unify the theoretical and the institutional levels. And for this, let me suggest that biophysical principles governed by thermodynamic laws are the suitable tool, not least because they immediately unify economics and social science generally to physics and biology, making the whole comprehensible on common terms and exposing the pre-scientific illusions of the neoclassical edifice. 

When I first met Joan Robinson – I was on my first days as a graduate student the one year I spent at Cambridge – she took me to lunch in the buttery of the University Library and explained, and I remember her saying this explicitly, “You can’t put time on an IS-LM diagram.” I had no idea at that moment what she was saying, but I would now rephrase it as “economics is subject to entropy just as much as anything else.”

In a biophysical nutshell, all activity requires resources, which must yield a surplus, a greater return than they cost to extract. This is not a new idea at the Accademia Nazionale dei Lincei. Alberto Quadrio Curzio were he here would, I trust, appreciate my putting it in the first place. Secondly, all extraction requires prior fixed investment – whether you’re talking about photosynthesis or nuclear fission – which is made only with the expectation of profit under conditions of uncertainty, which are influenced by discount rates and the cost of capital. Credit money – and we are talking about monetary production here so we have to bring this in – is a device for concentrating capital in hands capable of using it in a more or less civilized substitute for piracy and pillage (the previous common ways of achieving this). All investments have a limited term. Nothing goes on forever. There is no equilibrium. Nothing is permanent. There is no end of history. So far as I can say, every element of the Keynes, Kaldor, Sraffa, Pasinetti vision is compatible with this one. In particular, as Pasinetti urged, it places production and the decision to produce at the heart of the analysis, not the exchange of somehow mysteriously previously produced goods (as in the Walras, Marshall, Arrow, Debreu scheme of things). 


Theories of Value

Pasinetti was always very concerned, continuing to the end of his life as we’ve just heard, with the theory of value. Well, production is about the realization of economic value. And I would argue, and I am arguing with co-author Jing Chen in papers and a forthcoming book, that value depends on two considerations: scarcity (Walras’ preferred formulation) in relation to the size of the market, and market power (or the degree of competition), which, obviously, is already acknowledged in Joan Robinson’s work on imperfect competition. Both of these can be captured by a simple logarithm function, where scarcity is the argument expressed as a probability and the number of suppliers or the degree of monopolies is just the base of the logarithm. In this very simple scheme, as market penetration or the number of suppliers increases, value goes down. If one takes an average across a range of products or processes, then the mathematical expression is identical to entropy or to information in Shannon’s theories, results quite consistent across a range of fields. The expression and its underlying concept are inherently dynamic, highlighting the quest for value in novelty, in exclusiveness, in market expansion and market control. The decision to produce can likewise be captured by a somewhat less simple differential equation taking account of fixed and variable costs, project duration, discount rate, and uncertainty. 

The intuition is familiar to any business in that efficiencies and conveniences of modern life were made possible by large fixed investments in a climate of low uncertainty and readily available cheap resources, facilitating rapid technical improvement. This is the extraordinary confluence of Keynesian macro management and the age of oil, beginning in the 1920s but really taking root in the 1930s: in a world (from the 1940s onward) that was for a long time stabilized by a global framework managed by the United States, through certain institutions, including the United Nations. 

Once again, there is no stasis and no equilibrium. Favorable conditions can be upset by changing physical conditions, resource depletion, or by shifting control over resources, or by mismanagement (leaving the available resources idle), or by a shift in the management of the whole system from a concept of stewardship (that is the fostering of economic development on a broad basis) to one of predation (which is to say, the drive to hoard the resources and make them scarce for a large part of the world’s population). These things have become characteristic since the 1970s, especially since the 1980s, and even more especially since the early 2000s with the resulting decline in the biological rate of return (that is to say the rate of reproduction of the human species) and prospective population declines are now the evident consequence of what is a very straightforward economic decision on the part of millions of households. 


Money, Plans, and Distribution

Monetary production presupposes money. And from a pedagogical and political perspective, I have to here speak on behalf of some American colleagues of mine, again defending the few saving graces in the national outlook at the moment. But the greatest recent progress toward accomplishing Pasinetti’s revolution in this area has built on Keynes particularly the Treatise on Money, Hyman Minsky and his arguments about financial instability. And this is the purview of a group of scholars who have coined the phrase Modern Monetary Theory (MMT), whose threat to the neoclassical mainstream is extremely evident from the scorn that is poured on these people by academics in prominent positions. 

But the fact is, their work helps to clarify that money is created by governments and by banks to do things, to create specific and aggregate effective demand. Here a critical distinction is between sovereign and not-so-sovereign monies in the hierarchy of World Finance. For the former, the approach to full employment is limited only by real resource constraints. As Keynes argued, anything you can do you can afford to do. The only constraint is what you can’t actually do. For those who are not in so favored a position, the access to real resources is rationed by the access to external finance. In this way, a colonial system was perpetuated in the post colonial era, so to speak, by the back door. 

The biophysical framework presupposes plans. That is to say, it calls our attention to the fact that a system of any kind has different parts for different functions, which generally work together but sometimes break down. This is like any living creature or any machine. It is not the interaction of particles, neither stable nor complex nor chaotic, as in agent-based models, but differentiated and integrated. And here to restate the point: like every biological or mechanical system, human societies and their economies work according to plans. In living entities, these are encoded in genes, in machines and buildings in blueprints, and in societies and economies in habits, regulations, and laws. These evolved in different ways in different places which is why there is no universal best formula for economic policy and why all attempts to impose one – to come back to the Washington Consensus – are doomed. Let alone the vain hope that markets (sometimes and somehow left alone) will self regulate or self organize. You cannot assimilate those concepts to a biophysical perspective consistent with biology, mechanics, or economics in the vein of Keynes and Pasinetti. 

Finally, a biophysical framework integrates monetary production to the study of distribution – not merely the functional distribution, but also the distribution of pay or household income – so that the evolution of inequalities at the global level (captured in national and regional datasets) becomes an artifact of macroeconomic performance. This is how macroeconomics controls microeconomic outcomes, and the exercise of economic power. I have built up that particular argument over years from the bottom up, beginning with the application of Henri Theil’s entropy-based measures of inequality to administrative and industrial datasets, leading, ultimately, to showing how innovation drives inequality in advanced countries while the actions of the global monetary and financial regime, which changes over time, dominate the movement of inequalities within countries over most of the globe, most of the time. This work establishes that the stabilization or reduction of inequalities is a regulatory function, without which societies tend to become quite unstable. It is as necessary as the control of effective aggregate demand. But it is achieved only in relatively strong states, with strong institutions. And at the level of global governance, that is a revolution still far from being accomplished. 

So I’d just like to acknowledge that it was Luigi Pasinetti’s curiosity about this work – his immediate understanding, I think, of how well it fit under his larger scheme of things – that led him to suggest my name for the election to this body and, therefore, to the privilege I feel with being able to speak to you from this platform today. It is simply a very great honor to be able to pay tribute to this great, soft spoken, modest man: a really marvelous role model for anybody who wants to take the business of thinking seriously, particularly in economics. And it’s a pleasure to stand with fellow revolutionaries as we move, I hope, to complete the project of which he spoke.


James K. Galbraith is Lloyd M. Bentsen, jr. Chair in Government/Business Relations at the Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin. He holds a PhD in Economics from Yale.

Read his other contributions to the symposium at the links below:

Industrial Policy Is a Good Idea, but So Far We Don’t Have One

Entropy, the Theory of Value and the Future of Humanity

Will Austerity and Precarity Finish Off the Human Species?

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