A classical economist looks at modern macro

This is the first draft of the conclusion of the paper I have finally finished on classical economic theory. The rest of the paper leads up to these conclusions. Whether it is published is, of course, not in my hands. But after the mess that has been made of economic management following the GFC, there is plenty of real world evidence that modern theory has a lot to answer for.

The one thing all sides can agree on is that there was a “classical economics” before Keynes published his General Theory and that modern macroeconomic theory is different from classical economic theory. Beyond that, other than a superficial gloss on what that classical theory consisted of, virtually no modern economist any longer knows what that classical theory was. This paper has therefore provided an explanation of the economics before Keynes, focusing as Keynes did on what we would today describe as the macroeconomic issues. What makes this paper particularly useful is that it has been written by someone who believes the economics of John Stuart Mill is superior to modern macroeconomic theory. Whether others will share this belief after reading the paper is neither here nor there. The actual intent is to allow modern economists to gain an appreciation and understanding of the economic theories of their predecessors.

Possibly the greatest obstacle for modern economists is that they assume a pre-Keynesian economist had no theory of involuntary unemployment. The quote from Mill at the start of this paper, plus recognition that there had been a detailed and intricate theory of the cycle that had developed for over a century through until 1936, should provide some incentive for economists to examine the great history of their own subject, not only with a sense of the grandeur and depth of understanding that has pervaded our subject since its origins in Adam Smith and The Wealth of Nations, but with a sense of adventure about finding out what they knew that we do not. As J.E. Cairnes (1888: iv-v) pointed out at the end of the nineteenth century, whatever mathematics may have brought to economic theory, it has not provided any additional insights into our understanding of the underlying dynamics of an economy. The broad features of the economies we live in today were evident even as far back as 1776. The belief that we know something a classical economist did not about human motivations, the potential for markets to bring prosperity, the need for government regulations to be properly crafted, or the pros and cons in relation to the provision of welfare are beliefs that cannot withstand a deeper understanding of classical theory. We may have better statistics and more sophisticated analytical techniques, but the theories a modern economist applies to make sense of it all are not obviously better than the theories that had prevailed before the publication of The General Theory in 1936. The argument presented here is that they are, in fact, actually worse.

Your thoughts would be welcome.

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