Reconstructing Political Economy Reconstructing Political Economy offers an original perspective on the questions the great economists have asked and looks at their significance for today’s world. Written in a provocative and accessible style, it examines how the diverse traditions of political economy have conceptualized economic issues, events and theory. Going beyond the orthodoxies of mainstream economics, it shows the relevance of political economy to debates on the economic meaning today. This book is a timely and thought provoking contribution to a political economy for our time. In this light, it offers fresh insights into such issues as modern theories of growth, the historic relations between state and market, and the significance of globalization for modern societies. Reconstructing Political Economy will be of great interest to economists, political scientists, and historians of economic thought. William K.Tabb is Professor of Economics and Political Science at Queens College and the Graduate Center of the City University of New York. He is the author of The Japanese System: Cultural Economy and Economic Transformation, The Political Economy of the Black Ghetto; and co-editor of Instability and Change in the World Economy. Contemporary Political Economy series Edited by Jonathan Michie, Birkbeck College, University of London Reconstructing Political Economy The great divide in economic thought William K.Tabb London and New York First published 1999 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2002. © 1999 William K.Tabb All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data Tabb, William K. Reconstructing political economy: the great divide in economic thought/William K.Tabb. p. cm. —(Contemporary political economy series) Includes bibliographical references and index. ISBN 0-415-20762-2 (hardbound: alk. paper). — ISBN 0-415-20763-0 (pbk.: alk. paper) 1. Economics. 2. Economics—History. I. Title. II. Series. HB171.5.T13 1999 330–dc2 198–47961 CIP ISBN 0-415-20762-2 (hbk) ISBN 0-415-20763-0 (pbk) ISBN 0-203-04931-4 Master e-book ISBN ISBN 0-203-20698-3 (Glassbook Format) The Econ tribe occupies a vast territory within the far North. Their land appears bleak and dismal to the outsider, and travelling through it makes rough sledding; but the Econ, through a long period of adoption, have learned to wrest a living of sorts from it. They are not without some genuine and sometimes even fierce attachment to their ancestral ground, and their young are brought up to feel contempt for the softer living in the warm lands of their neighbours, such as the Polscis and the Sociogs. Despite a common genetical heritage, relations with these tribes are strained the distrust and contempt that the average Econ feels for these neighbours being heartily reciprocated by the latter—and social intercourse with them is inhibited by numerous taboos. The extreme clannishness, not to say xenophobia, of the Econ makes life among them difficult and perhaps even dangerous for the outsider. This probably accounts for the fact that the Econ have so far not been systematically studied. (Leijonhufvud 1973:347) Contents 1 The two cultures in economics 1 2 Of dialogic debates and the uncertain embrace 17 3 Contestation and canonicity: the Adam Smith problem 32 4 The legacies of classical political economy 53 5 Marx and the long run 75 6 The neoclassical (counter) revolution 91 7 Heterodoxy and holism 111 8 Keynes and the world turned upside down 132 9 The last half-century in the mainstream 154 10 Theorizing economic growth 177 11 From equilibrium into history 203 Notes 226 References 250 Index 281 1 The two cultures in economics [A]nalytic effort is of necessity preceded by a preanalytic cognitive act that supplies the raw material for the analytic effort… [T]his preanalytic cognitive act will be called Vision. It is interesting to note that vision of this kind not only must precede historically the emergence of analytic effort in any field but also must re-enter the history of every established science each time somebody teaches us to see things in a light of which the source is not to be found in the facts, methods, and results of the preexisting state of the science. (Schumpeter 1954:41) Arjo Klamer (1990) has a way of describing what is peculiar about modern economics. He draws a square to stand for the rigid axiomatic method that dominates most journals in the field. The square, he points out, is the ideal shape of modernist architecture and painting, of Mondrian and Mies van der Rohe. Squares are about facts and logic. Show me the theorem. Then he draws a circle some distance from the square. Circles are about metaphor and story. Circle reasoning is the other half. Tell me your story. Since the seventeenth century, and especially during the mid- twentieth century the square and the circle have stood in nonoverlapping spheres, sneering at each other. (McCloskey 1993:69) One is tempted to say that there are two types of people, those who require determinacy and closure, and those who can tolerate ambiguity and open-endedness. (Samuels 1992:11) The work of most economists consciously or not involves a characterization of their own time and place. For Adam Smith, it is the conflict between an old system of centralized authority in which the crown attempted to organize allocation of resources, and a new way of doing things in which individuals were to be trusted to know their own best interests; and, rather than these interests being only in conflict, Smith said that out of competition would come greater wealth for the nation (yet he did, as we shall see, support statist interventions in some circumstances). Within half a century, the business class had grown and the conflict between landlords and capitalists became the central issue. Thomas Malthus developed theories that supported the claims of the landlord class, whilst David Ricardo championed the manufacturers. These classical economists saw the period in which they lived as a 2 Reconstructing Political Economy transitional one of struggle for control over the future direction of society. Advocacy of competing claims brings out the creative talents of thinking individuals as they reconceptualize the world around them. In the Great Depression, John Maynard Keynes addressed the causes of unemployment by reinterpreting how capitalism functions. State intervention, which in Smith’s time was often an exercise in monopoly power to extend privilege and economic rents to friends of the sovereign, becomes for Keynes, in an era of democratic governance, a vehicle that, if used wisely, could produce stability and generate growth. By the end of the twentieth century, the cutting edge of economics was a new classical economics which, because of developments in the larger society, theorized state intervention as the problem and not the solution. Deregulation, privatization and market flexibility were once again the point of departure for innovative economics. I will suggest that after neoliberalism as a policy practice, and new classical economics as a theoretical stance, have run their course, the strength of the political economy approach will become more prominent within the profession. The reason is that the social structure of accumulation and regulatory regime that dominated the postwar period has eroded. This process of decomposition is one in which market forces do this work, or rather their undoing work. At a certain point, it is argued, this negative moment comes to have severe costs; it goes too far in a sense, and there is need to build a new stable, regulatory pattern. This argument will be more appealing to readers for whom the political economy approach to the institutional embeddedness of markets and concerns over the costs of social inefficiency are core parts of how they understand economics. Material conditions and epochal change interact with people’s Weltanschauung, world-view, pre-analytic vision, personal psychology and optimistic or pessimistic natures, and together contribute as much and perhaps more than their education and training to how they go about answering such questions. There are those who see order and stability underlying temporary dislocations; others see instability as the norm. The first group wants to explain permanence; the second studies the nature of evolution and change. The mainstream of economic science concerns itself with the first sort of project. This book is about understanding socio-economic transformation from the latter perspective, which I will call the mainline tradition. Our subject is how change in the political economy is experienced and theorized. We take a long view in examining how economists think and have thought over the last 200 years and more about the economy—how they make up the stories and ways of answering questions they label economic. This book explores how to think about our own time through a rereading of the history of economic thought. It is both an intervention in an ongoing conversation concerning what constitutes a usable economics and a reflection on the classical question of the nature and causes of the wealth and wellbeing of nations. It is written for those who are coming into this ongoing conversation with little knowledge of what has been said and are confused as a result.