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Methodology and Radical Political Economics RESEARCH INSTITUTE POLITICAL ECONOMY Methodology and Radical Political Economics Martin H. Wolfson October 2007 Gordon Hall 418 North Pleasant Street Amherst, MA 01002 Phone: 413.545.6355 Fax: 413.577.0261 Presented at [email protected] www.peri.umass.edu REBELLIOUS MACROECONOMICS: MARX, KEYNES & CROTTY A conference in honor of James Crotty Methodology and Radical Political Economics Martin H. Wolfson Department of Economics and Policy Studies University of Notre Dame Notre Dame, IN 46556 Prepared for the Conference in honor of Jim Crotty University of Massachusetts at Amherst October 19-20, 2007 Methodology and Radical Political Economics by Martin H. Wolfson 1. Introduction Radical political economics has always encompassed a wide variety of economic theories and perspectives. In fact, printed in each issue of the Review of Radical Political Economics is the following statement: "As the journal of the Union for Radical Political Economics, the Review publishes innovative research in political economy broadly defined as including, but not confined to, Marxian economics, post-Keynesian economics, Sraffian economics, feminist economics, and radical institutional economics." Given the broad purview of radical political economics, the question arises: do the various theories that make up radical political economics have some methodological coherence, or are they disjoint B united in their opposition to neoclassical economics, but with theoretical assumptions, principles and methods, i.e., methodologies, that are incompatible with each other? The argument of this paper is that there is coherence.1 In particular, there is an emerging heterodox macroeconomic framework that builds upon the perspectives of Karl Marx, John Maynard Keynes, and institutionalists like Wesley Clair Mitchell.2 A leader in the development of this framework is James R. Crotty. Throughout his career, Crotty has investigated, and sought an integration of, Marxian, Keynesian, and institutionalist perspectives. In particular, Crotty's contributions have been to 1) combine principles from the three perspectives into an integrated framework, 2) deepen our understanding of the three perspectives by indicating how they are more complementary than typically understood, and, 3) extend the basic principles to provide a coherent understanding of the current 2 global economy. In the next section of the paper, key assumptions and principles of the Marxian, Keynesian, and institutional perspectives, which form the building blocks for the new framework, will be discussed. In the third section, Crotty's contributions to combining, deepening, and extending these perspectives into a new framework will be addressed. Finally, the fourth section concludes with a statement of the new methodological framework. 2. Building Blocks: Marx, Keynes, and Mitchell Below are the building blocks, or starting points, for the new heterodox macroeconomic framework. They are basic methodological assumptions and principles from Marx, Keynes, and Mitchell. They are often taken to be representative of three separate theories, with little or no convergence. 2.1. Karl Marx 1) Historical Materialism This basic philosophical perspective of Marx's has been the subject of numerous books, articles, and treatises. At the risk of oversimplification, I take it to mean two basic concepts. First, people's "material conditions," especially the social relations of production (the relationships people enter into in the process of production), have an important influence on the ideas, culture, religion, politics, and other aspects of the "superstructure" of society. This materialist point of view should be distinguished from determinism, which claims that the material conditions determine the superstructure, and from the view that the superstructure has no effect or influence on the material conditions. An important implication of Marx's materialist philosophy is that one needs to make a "concrete analysis of concrete conditions," i.e., 3 thoroughly investigate the reality one is trying to explain. Second, historical analysis is an essential component of the Marxian perspective. One cannot understand current reality without analyzing the historical forces that have brought the present into being. 2) Dialectical contradiction The process that propels history forward is the working out of the contradictory relationship between two opposing forces. These opposing forces have different interests and are always in struggle with each other. This perspective has two important and related implications. First, the change that results from contradictions is endogenous. It is internal to the contradictory relationship being analyzed. Second, there is no permanent equilibrium. The two opposing forces within a contradiction can arrive at a temporary equilibrium, which is best understood as stabilization at a moment in time. But because the two forces continue to be in contradiction with one another, struggle will continue that will eventually disrupt that temporary equilibrium. This is not to say that exogenous events cannot play a role in Marxian analysis. But Marx's concept of dialectical contradiction rules out the neoclassical view of equilibrium as a permanent end point that can be disrupted only by exogenous "shocks." 3) Class conflict In Marx's analysis, the fundamental contradiction in capitalist society is between capital and labor. The historical working out of the contradiction between these two opposing forces is the key to understanding the dynamics of a capitalist economy. 4 Also important are intra-class conflicts, such as those between industrial and financial capital, among capitalist firms competing with each other, and also among segments of the working class. 4) Theory of the state In capitalist society the dominant class, i.e., the capitalist class, has a dominant influence on the "state," taken to be the apparatus of government broadly conceived: the legislative and executive branches, the courts, police, military, etc. Many Marxists view the state as a "contested terrain," in which labor can vie for influence, but in which the capitalist class usually dominates because of instrumental and structural influences. Because of its income and wealth, the capitalist class can influence the levers, or "instruments" of state power. For example, representatives of the capitalist class can be appointed or elected to positions of power, and their lobbyists can influence decisions. Also, capitalists hold a central structural position within a capitalist economy. They hire and fire workers and make decisions about the expansion of production and investment. Even governments sympathetic to labor are influenced by the powerful role capitalists play in a capitalist economy. 5) Evolution of economic systems Marx analyzed a progression of economic systems, from simple commodity production, slavery, feudalism, to capitalism. He predicted that capitalism would be replaced by socialism. In the contradiction between capital and labor, labor would become dominant and would change the institutional structures defining capitalism to those compatible with a socialist system. Aiding this transition would be the contradiction between the forces of production (such as plant 5 and equipment, technology, and human skills and abilities) and the social relations of production. Marx thought that capitalist social relations would increasingly become obstacles to further growth of the forces of production, and would be transformed. Despite continuing controversies about Marx's prediction of socialism, his theory that class struggle, and the contradiction between the forces and social relations of production, would lead to a new institutional structure is a key building block of the new macroeconomic framework, as discussed below. 2.2. John Maynard Keynes 1) Fundamental uncertainty Nobel laureate Niels Bohr said Ait is difficult to make predictions, especially about the future.@ As Keynes stressed, about much of the future, we simply do not know. Note that this is much different from the neoclassical concept of risk, which enables one to know all possible future events and establish a probability for each. 2) Financial crises and speculation Because of fundamental uncertainty, financial markets are subject to crises and speculation. Herd behavior leads to euphoric booms and sudden panic, when the optimistic expectations that fueled the boom are not fulfilled. 2.3. Wesley Clair Mitchell 1) Endogenous business cycle Mitchell, the founder of the National Bureau of Economic Research, was a leading institutional economist of the early twentieth century. He pioneered quantitative research on the business cycle. Based on his research, he hypothesized an endogenous business cycle with 6 various stages, such as recovery, expansion, crisis, panic, and depression. Mitchell's business cycle is endogenous in the sense that it traces a process of cumulative change in which one stage of the cycle is transformed into the next. 2) Institutional methods Mitchell's methods were both quantitative and institutional. He accumulated data on hundreds of data series and then analyzed the data inductively to create his theoretical concepts. He focused on quantitative data. Other institutionalists have used other methods, such as surveys, participant-observer techniques, pattern models, historical analysis, etc. But like all institutionalists, he understood that a concrete, detailed investigation of institutional conditions was a necessary element to the understanding
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