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Political Economy Research Institute, University of Massachusetts at Amherst, December RESEARCH INSTITUTE POLITICAL ECONOMY Does Heterodox Economics Need a Crisis Theory? From Profit-Squeeze to the Global Liquidity Meltdown Gary A. Dymski 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 Does Heterodox Macroeconomics Need a Crisis Theory? From Profit-Squeeze to the Global Liquidity Meltdown Gary A. Dymski August 21, 2007∗ What has yet to be accomplished and what is perhaps the most pressing task presently confronting macroeconomists is the development of a theoretical framework that can adequately incorporate both of these set of contributions [those of Keynes and Marx] and model the complex and rapidly evolving structure of mutual interaction and codetermination between the real and financial sectors. (James Crotty, 1990, p. 541) Introduction Is there a need for a heterodox macroeconomic theory of crisis? If so, what are its elements, and how can these be used to make sense of developments in the world’s economies? Among James Crotty’s definitive contributions to heterodox theory are his forceful answers to these questions. Crotty’s writings on macroeconomics and crisis have had three distinct phases. The centerpiece of his first phase was the paper on the political business-cycle he wrote with Boddy, which is discussed below. In the 1980s, Jim deepened his theoretical understanding of the sources, forms, and trajectories of economic crises. This involved him in extended readings of Marx, Keynes, Schumpeter, and Kalecki. His capstone article in this period was his 1985 paper on Marxian crisis theory. It led as well to an extended encounter with Hyman Minsky’s financial-instability framework. In the 1990s, Crotty turned away from more abstract concerns and focused on financial and economic crises outside the US, especially the crisis of Korean development in the context of the Asian financial crisis. In all of these phases, Crotty has always insisted that heterodox macroeconomic theory constitutes a distinct terrain of inquiry, which cannot be reduced to a curiosum in an equilibrium model. In his view, heterodox macroeconomics constitutes not just a set of postulates, but more fundamentally a method and a terrain of logical possibility. The possibilities that matter most to a heterodox investigabor are those that make manifest the relations of power, the impact of uncertainty, and the consequences of firm strategies. It is these framing concerns of heterodox macroeconomic theory, in turn, that provide a point of departure for a heterodox theory of crisis.1 ∗ Director, University of California Center Sacramento (UCCS) and Professor of Economics, University of California, Riverside (on leave). Contact information: UCCS, 1130 K Street Suite LL22, Sacramento CA 95814. Phone: 916-445-5900. Email: [email protected]. Prepared for the conference Heterodox Macroeconomics, Crisis Theory and Fundamental Uncertainty, honoring Professor James Crotty. The author has a debt to the honoree so deep that even Charles Ponzi could not devise a scheme to pay it back. 1 Heterodox economics is often misunderstood as an anti-doctrine. For example, a New York Times reporter (Hayes, 2007) wrote that ‘heterodox’ “categorizes people by what they don't believe .. in the case of heterodox economists, what they don't believe is the neoclassical model that anchors the economics profession.” 1 After succinctly (and presumptuously) expositing Crotty’s approach to heterodox crisis theory, this chapter revisits the 1980s debate between Crotty and Hyman Minsky about the sources of economic crisis. Crotty, while among the deepest admirers of Minsky’s financial instability hypothesis, criticized its inattention to the determinants of investment, and by extension to capital-labor conflict. Crotty’s insights into capital-labor conflict in the US’s “Golden Age” can explain why Minsky’s policy prescription for the capitalist economy’s instability and stagnation fall short in the neoliberal era.2 Comprehending the sources of crisis in the neoliberal age requires allowing for “the complex and rapidly evolving structure of mutual interaction and codetermination between the real and financial sectors,” as Crotty writes in the passage excerpted above. 2. The Elements of Heterodox Macroeconomic Theory and the Problem of Crisis What are the elements of heterodox macroeconomic theory, in a Crottyian approach? First and foremost, Crotty has always insisted that a heterodox macroeconomic theory must remember its own past. Drawing on the ideas of from Keynes, Marx, Minsky, and Schumpeter, in Crotty’s view, will lead nowhere unless the origins of economic ideas in circulation are acknowledged. A heterodoxy exists only in dialogue with – not as appendage to – an orthodoxy. Orthodoxy defines a ruling method and set of ideas and polices its boundaries. A heterodoxy follows alternative methods and ideas, which when used as sources of inspiration and struggle can lead to conclusions unimagined under orthodox constraints. There must be something big at stake – some very fundamental principles that are being overlooked in the ruling edifice, perhaps in some relation to a frustrated political impulse. If individual heterodox ideas are inserted into orthodox frameworks, they may lead to unexpected insights; but without the connection of these ideas to their historical forebears, there is nowhere to go.3 And it is too heavy a burden to insist that the disaffected members of every younger generation reinvent heterodox ideas; it is much more feasible to drink from old streams than to find new ones (especially in periods of drought). This has strong implications: it means that heterodox theorists are always living in the shadows of their ancestors. These ancestors are not to be surpassed, not to be forgotten or simply dropped as inconvenient truths. This sense of humility helps to keeps heterodoxy alive: for the elders 2 Many heterodox economists refer to the years from the end of World War II to the mid-1970s as the “Golden Age,” in which a successful “social structure of accumulation” guaranteed both high real wages for workers and high profit rates for capitalists. See Marglin and Schor (1992). 3 As an example, look how intellectually empty is the “sunspot” approach to macroeconomic dynamics. Something that was not supposed to happen in orthodox frameworks happens – there is not a unique equilibrium, despite otherwise well-behaved assumptions. But those engaged in this discourse, rather than considering that the severe constraints of these models may blind their users to important real-world possibilities, instead assume there are “sunspot equilibria” which depend on factors outside the orbit of economic theory (and for which theorists thus have no responsibility). 2 handing on knowledge maps to the next generation view themselves fundamentally as links in chains, not as progenitors of their own works of creation. There are many possible heterodoxies. Indeed, different understandings of what orthodoxy is in economic theory can create different heterodoxies in reaction thereto. Jim Crotty’s critique of orthodoxy centers on four central points: (1) it presumes precoordination of resource exchanges through markets, thus denying the possibility of fallacies of composition in market outcomes that frustrate participants’ intentions; (2) it ignores power, which underlies many economic processes; (3) it ignores the role of firm strategy; and (4) it pays no attention to the defining institutional features of the real-world economy. Crotty’s critiques (1)-(3) aim squarely at the orthodoxy’s approach to theory qua theory. In Crotty’s view, an opposition to orthodoxy must be based first and foremost on an analytically coherent counter-approach. To deny the conclusion of one model, one must be clear about what alternative assumptions can generate other conclusions. The fourth critique, in turn, delineates Crotty’s approach to crisis. Following the footsteps of Marx (Crotty 1985) and Keynes (Crotty 1986), Crotty showed that embracing real time and ignorance not only means acknowledging the importance of fundamental uncertainty, but also discarding the possibility of pre-coordination.4 Even small failures in agents’ abilities to signal their intentions lead to aggregate demand/supply mismatches. That is, a real-time framework is invariably one in which unemployed labor and unsold goods are possible in equilibrium states. This in turn implies that aggregate demand has different determinants than aggregate supply, and may take on different magnitudes. Another implication of a real-time framework is that the financial sector plays an “active” role in determining the level of employment and output. Insofar as the financial sector transfers funds from net savers to net borrowers, its assessments of real-sector risks and opportunities – not to mention the terms and conditions on which it makes loans – determine how much growth occurs, and how. So financial firms and wealth-owners, in contending with the unknowable, develop conventions in the face of uncertainty, and the confidence to believe their own conventions. This leads immediately to the idea that financial instability is an inherent tendency in the capitalist economy: competitive pressures among firms and wealth-holders lead them to take on increasing degrees of leverage in search of higher rates of return; so when conditions change,
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