© Alain Parguez March 2004 Three short pieces           Back to News page
On the state of economic theory
What is the true message of hope for young committed economists?
After the session on Minsky organised by Eric Tymoigne at the 30th Convention of the Eastern Economic Association Annual Conference in Washington DC (Feb 20-22/2004) I wrote these three short pieces:

                     I                  There is hope because of the absolute sterility
                                         of the so-called ruling Elite of the "Profession"
                    II                  There is hope as long as we do not confuse
                                         economic theory with the history of economic thought
                                                 What is the true legacy of Keynes?
                    III                          All predictions of the future failed
                                                         Economists cannot be seers

                     IV                                            Intermezzo
      Piece I                  There is hope because of the absolute sterility
                                         of the so-called ruling Elite of the "Profession"
                          I am well aware of a message of false optimism sent by those of us who desperately strives to attract the attention of the self-proclaimed Elite-on-the-edge of the « Profession ». They use to invoke the life-long efforts of Minsky and Keynes! What is at stake are the following postulates:

P1. Those who benefit from celebrity, prestige, money, etc deserve it for a pure objective motive, the advance of science.

P2. They are perfectly open-minded in  terms of ideas because they are free from any kind of theoretical commitment, they are the first perfect scientists without any kind of pre-existing assumptions.

P3. What only matters is modelization only relying on perfectly neutral high mathematics.

P4. What is therefore to be done to be accepted is to learn high maths and  wait humbly at the gates for the Call!

P1 is obviously enshrined into an extreme optimal allocation of resources view. I am still expecting the proof that power and fame only reflects the pure genie of science! P1 is implying P2, there would exist on the edge the first generation not enslaved to any kind of a priori in terms of theory and ideology and social commitment. P2 means that the Elite-edge has buried neo-classical economics a long time ago and is keen to address all the issues ignored by the erstwhile neo-classical economists. Were P3 true, we could discover models galore addressing what is economics for us, encompassing :
         1                                                      2                                              3
Money as the                               Money requiring                       The very existence
existence condition                       the State as                               of the State
of the economic                            a necessary                                denying the very
system                                          condition                                     possibility of perfect markets

          4                                                     5                                               6
the absence of constraint           The laws of the zero sum                The absolute unknowability
on the State ability to                 of sectorial deficits                         of the future resulting from
spend                                                                                                   the infinity of  possible futures
          7                                                      8
the strong hierarchical structure       The full-exogeneity
of the economy reflected                   of interest rates relative               Etc.
by the crucial role of the                    to market equilibrium
desired rate(share)of profit in            conditions
the determination of employment
Any objective inquiry proves that none of this tests can be sustained by the edge-elite litterature which cannot accept the existence of macro-economic laws constraining «agents» trajectories. It is therefore just an effort to save the erstwhile neo-classical program by hiding its postulates under the guise of not-that-high mathematics. Postulate 3 is irrelevant : edge-elite economists are so enthralled to the economics in which they were trained that they admire as wonderful feats what is obvious for free-minded people like us :

-Non-linear dynamics : how could there be linear dynamics in a universe ruled by the absolute indeterminate essence of time.

-Heterogeneous agents : indeed they are. We all knew that !

-Institutions : of course they are the root

-Non-perfect Barro-like rationality

-Imperfect markets indeed perfect markets cannot exist in a State-money fully uncertain universe!


Ultimately, dialog with such an ultra-conservative and parochial ruling bureaucracy is a waste of time and energy. Such a conclusion is not a critique of «high» Maths  even of their genuine use but just a critique of their use as a  guise to protect empty «models» which, indeed, are models of Nothing.
We are told that Minsky had some influence on the learned ruling elite…I just read the last book of Stiglitz : Monetary economics, a well-respected member of this elite.

-Never is Minsky mentioned!
-Only two vague references to Keynes
-Robertson is acclaimed as the precursor
-There are utility functions and maximisations galore
-Banks do not create money but just sell information
-The State is just paid  a lip service and plays no part at all in the creation of money
-There could be banks and markets in a pure "corn economy" etc. which is the reference «model»
-Even IS-LM is rejuvenated and restored

What a progress !!  Hope there is because of this absolute emptiness of elite-economics which only survives because of the inertia of bureaucratic structures while nobody  is really interested in its feats, students, genuine hard-scientists, historians, sociologists etc. and decision-makers alike.

      Piece II                  There is hope as long as we do not confuse
                                          economic theory with the history of economic thought
                                                   What is the true legacy of Keynes?

                       History of economic thought does matter indeed but only in retrospect by a backwards methodology. As shown by Ricardo Bellofiore and Matthew Forstater at the session  on  Minsky), the sole sensible way of dealing with past writers is to start from our own general theory and go back to the past. It allows M.Forstater to discover wonderful examples of great past writers who were very close to the principles of the modern general theory of money. Without this framework one would never have paid attention to those hints at the core principles. A logical consequence is that one cannot rely on a forwards methodology using past writers as the source of our general economic theory.
Herein lies the Keynes’ problem. Once for all we should address the true legacy of Keynes and stop to indulge in an everlasting exegis leading to an age-long rewriting of Keynes. I just emphasize some crucial issues deserving much more developments :

1/ A long time ago the french economist Alain Barrière distinguished the « Spirit or Genie » of the GT, from its analytical structure, which is of no use at all and wrong.

 * The analysis of the principle of Effective            * The thorny and painful definition
    Demand which do not emphasize the crucial           of involuntary unemployment.
     role of the desired rate of profit.
     The so-called curves of chapter 3                       * The Multiplier (greater than one) that
     do not survive a careful analysis.                           required an equilibrium condition over
                                                                                      time  between I and S to attain
  * The absence of a theory                                         the postulated convergency,
      of profits                                                                 S being led by thriftiness

 * The absolute inconsistency between the full unknowability
     of the future and the investment function rooted into
     actuarian calculus Keynes himself rejects !

 * The ad-hoc notion of « Conventions » which has a strong neo-classical flavour


But the worse (or the most thorny ) issue is the theory of interest and money of chapter 17, especially one of the weirdest part of the GT. Keynes explicitly writes that were money a pure commodity (gold indeed), the demand for it would never generate involuntary unemployment......
and there is still more. Keynes never understands the true rôle of the State especially in the quasi-robertsonian note on pages 128-129, the difference between « loan expenditures » and « loanable funds » is not obvious ! He adamantly emphasizes the existence of a « budget constraint » on the State since Spending = Taxes + borrowing individual free savings and those individual savings must exist before State outlays.

2/ It means that all of us, including myself, we rewrote a Keynes in our image, a Keynes that never existed and may be could not exist. We used backwards methodology while pretending we were reasoning forwards. I went so far in this backwards-forwards alley that a long time ago I wrote that the GT could be used as a firm foundation for the Circuit Approach which is indeed absurd. Such a self imposed illusion is encompassing both the analytical structure and some aspects of the « Genie » of the GT. All of us were animated by a progressive forward-looking genie which was not always animating Keynes himself. We were keen to defend (protect) our theory by using the cloak of  the  « King ».
A comparison has been drawn between Minsky and Keynes relative to their life-long obsession of dialoguing with the conservative « Profession ». I do believe that Minsky was much more audacious than Keynes, much more ready to ignore the strait-jacket of conventional economics. His book is also a genuine rewriting of Keynes.

3/ History does matter also! Had Keynes not already be the most prominent technocrat long before he became «Keynesian» inspiring and advising the ruling class, would the GT have reached such a fame? The question is to be raised. Keynes himself was a character of this time not of our time, a time when Gold standard still haunted memories, a past with its own greatness which does not deserve some alternate history methodology.

       Piece III                         All predictions of the future failed
                                                         Economists cannot be seers
  As long as our young committed economist does believe that economics matters much for society, she (he) could be despaired by the failure of all efforts to predict the future. I am not aware of an example of a prediction by prominent elite-edge or even by Post-Keynesian non elitist, like myself, experts that did not fail! Let us think of four blatant failures :

1/ The planning soviet system is so successful that USSR is to successfully compete with the USA at the end of the twentieth century.

              A prediction of Schumpeter,
              The french economist François Perroux in the fifties and sixties of the XXth century,
               Jacques Attali, the chief adviser of François Mitterrand in the late seventies after a
               visit to USSR with  the candidate,
               etc. including a long time ago the elitist Solow………

2/ The achievement of the euro is to allow a perfect state of full-employment as soon as the mid of the first decade of the twenty-first century.

 All official experts who framed the monetary union including french
socialist experts of the Mitterrand regime.
3/ All policies of fiscal deflation are doomed to fail (in terms of their target, a zero or negative deficit) because of the induced collapse of tax revenue.
               A prediction of many Post-Keynesian (including myself) relative  to fiscal deflation in
               the USA and Canada in the second half of the nineties.
We were right for Europe (the Euro-zone) but wrong for North-America.

4/There is to be a entirely new economy rooted in information-technology bestowing exponential growth for eternity, uprooting for ever the seeds of financial instability.

               All elitist experts in the late nineties


All those predictions enshrine the postulate that at the time when they were revealed the observer knew, had a clear vision as a Seer, of the future. A Seer postulate implies that the future, as remote as it can be, is already existing now!  Some use of the Seer postulate are perfectly forgivable:
For example prediction 3. We did not (and possibly could not) take care of the simultaneous and cumulative rise in private debt which for a while compensated for public surpluses. Clintonomics as I have shown (in my West-Palm Beach paper) was a short-run success but non on its own terms. The cause of the success was not fiscal deflation but the dramatic increase in private debt to  banks finance as an escape way from State squeeze and income squeeze. As for Canada, it benefited from the private-debt boom in the USA and after from the Bush Administration deficit-stabilization policy. Both sustained a growth of the foreign sector deficit which, taking care of the increase in domestic private debt, explains the government surplus in Canada.

 What should now be predicted is that :
                           All efforts to exact a State surplus deeply destabilize the private economy
                           generating extreme Ponzi structure (USA) or are just attainable in a
                           dependent economy(Canada) enjoying foreign surplus
Other predictions are not forgivable because they are rooted in a false theory. They ensconce the dream of adjusting the inexisting future to their ideological model:

                 -It is obvious for predictions 2 and 4 rooted in an ideological postulate : Destroying
                  the State capacity to spend  generates prosperity (2), thanks to technology perfect
                  information will rule, markets(perfect ones) are to rule for ever, finance never can
                   be destabilizing (4).

                 -It is also true for prediction 1 rooted into the post-Walrasian myth of perfect
                  authoritarian planning authority. It was the time of growth models for

On Dark Prophecies of Experts
 These blatant failures teach a lesson we must spread amid the public opinion :
               When politicians relying on elite experts impose policies of atonement on the
                population to « save the future », they mislead public opinion.
                What a better example that the obsessive propaganda on the dogma :
                                In the future we are certain that Pensions systems, Social Security, etc.
                                will be short of cash without dramatic « reforms » leading to lower
                                 benefits and higher contributions or forced savings and greater taxes.
                                 As I shown in my note on pensions those predictions are false, seers-
                                 experts are blinded by their ideology or sheer interest, politicians are
                                 either ignorant or do want high unemployment and atonement.
                                 Imposing those policies will generate profit scarcity and destabilize the
                  One has to convince the population that as soon as a government prophetizes :
                                 We are short of money to spend.
                   It is wrong and reveals its ignorance, either there is no strait-jacket or it is a self-imposed strait-jacket
                   out of a free choice.

Ultimately, what is to be done! Seer we are not but thanks to our theoretical efforts we know that there is an infinity of possible futures at every moment! We know that there are ways to disaster but for unpredictable events, those ways we must convince decision-makers to close them in their own interest, as long as they care about the survival of the capitalist-market mode of production. We know that there are ways leading to a better world but for unpredictable events, we must convince decision-makers to open them. Taking care of the absolute inexistence of the future is to think of the best bets on the far future, because any society is free to choose the future it wants.
Governments relying on their ideological advisers (all being members of the ruling high-elite economic
« profession ») to claim that they are obliged to impose sacrifice on their population to save the future,  are misleading the people willingly or not.
Herein is the dark story of the Euro-zone dire situation, a pole of recession in the world economy, that will be addressed in a fourth piece. As the readers will discover, I am not against the Euro, what I am afraid of is its hijacking by an ultraconservative and rigid ideology contradicting all the principle of positive economics. There are ways to cure Europe achieving , true full-employment, those ways are closed by the European ruling class who does not want such a blessed state. It is not a surprise that french experts played a crucial part, they ignore the pillars of a true market economy.

                                                Economics as the Enlightement Science

                1/  When in my third piece, I wrote that we have to enlighten Decision-Makers.
                      I meant all potential Decision-Makers including Unions, NGOs, political
                      leaders, religious leaders, columnists and indeed students.
                      From this perspective, Economics is the science of Democracy, what remains
                      of  Democracy when people are misled and taught to live in the yoke of
                      imaginary threats.

                2/  Scientific enlightement means that the Present must not be indicted relative
                     to a blessed imaginary Past, economists are too prone to extol the past, eg :
                                        -The blessed Fordist era,
                                        -The blessed welfare « Keynesian » era
                                         -The blessed fixed exchange rate era.........
                      I do not understand why so many PKs support the Bretton-woods F.E.R system
                      It generates the same constraint that the Gold Exchange Standard, or worse.
                      This system failed because it was doomed ... a makeshift sytem that was soon
                      What is to be done is to indict the present leadership for not doing what can be
                      and must be done to grant society at large the better future one could imagine
                      taking care of course of all impredictable events (cf my third piece).

                 3/  It requires indeed a tremendous energy invested into the elaboration of a
                      General Theory, what is dramatically needed is not less theory but more
                      genuine theory.

                  4/  What is also required is genuine interdisciplinary programs encompassing
                        analytical tools (Statistics, Mathematics) but also History, History of
                        Economic Thought, History of ideas, Philosophy and Political Science
                        and studies of the world as it exists....etc.
                        What would Smith, Ricardo, Marx, Kalecki, Von Mises, Hayeck etc. say
                        about the withered mainstream Department of Economics !?
                        As far as I know there are now two already existing programs meeting
                        this enlightenment criteria :
                                                   *                                                              *
                                The program implemented                       In France
                                in the Department of Economics             a program implemented
                                of the University of Missouri                   at the University of Besancon
                                at Kansas City                                          Faculty of Law, Economics
                                a model in every respect                          and Political Science :
                                                                                           Certificat du Monde Contemporain*
                                                                                            En : Studies of the Global Society

· This program is encompassing Economics, History, Statistics, Sociology, Law, Geography, History of ideas and English. It attracts bright students.

Now it will be time for my fourth piece

May 2004 : Like the three Musketeers the three short pieces are now four !
The fourth is available here