Not quite the last and there are more every day

This was the original post from Thomas Humphrey:

I would like to nominate Professor James Ahiakpor for the position of “Last of the Classical Economists.” This honorific title recognizes James’s stalwart and unceasing insistence that all monetary theorizing since the classical era of Hume, Smith, Thornton, Ricardo, and others has been a snare and a delusion, a retrogression not an advance. It honors James for never saying die, for never admitting defeat, for always pressing on, and for keeping alive the flame of classical monetary theory in this age of heretics, doubters, and dissenters.

I know James and think of him as one of the very few on my classical side of the fence. We have disagreed on things as friends might often do. But we are on the same side. Nonetheless, he is not the only classical economist, so I put up a follow up post to say so:

I think there are more classical economists around than Thomas Humphrey might have taken into account. I always call myself a classical economist to differentiate my views from those who have come later. And given my partiality to John Stuart Mill and Say’s Law, I don’t think there should really be any doubt where my views might be placed.

But let me also say there are more of us classical economists around than you might think. Not a lot but definitely more than just one. Can I therefore recommend to you David Simpson’s extraordinary and excellent, The Rediscovery of Classical Economics: Adaptation, Complexity and Growth (Elgar 2013). This is exactly what the title discusses, the importance of thinking about economic issues with the concepts that had existed amongst the genuinely classical economists at a time before the emergence of marginal analysis and our modern focus on equilibrium. If you read it, you will find modern economic theory not only a pallid imitation of what a true economic theory ought to be but also understand why our textbook version of economics has become near useless in either comprehending or managing our economies.

Following which James himself added this:

Delighted to see Steve’s post regarding the “Last Classical Economist.” I wonder why Tom thinks he has seen the last of the classical economists? Sure, J.M. Keynes used that term almost as a slur. That is why several upholders of the classical tradition, including Dennis Robertson and Ralph Hawtrey, shied away from it. But I embrace that label with pride, just as Steve and some others do.

In fact, after I’ve introduced my students to the evolution of modern macroeconomics that includes the seven schools of thought that I identify, they often ask to know to which I belong. Some express surprise when I tell them, “None!” The schools are (1) Neoclassical Keynesianism, (2) Post Keynesians, (3) New Keynesians, (4) Monetarism, (5) New Classicals, (6) Real Business Cycle Theorists, and (7) Austrians. (I leave out the Marxists.) I also mention that all but the post Keynesians have Nobel Prize winners among them. Several students also tend to ask me why not many economists, including our textbook authors, appear to be aware of the classical macroeconomic principles, including definitions of such terms as saving, capital, investment, and money, that I explain to them and they can clearly understand. My response tends to vary from “I don’t know” to “I’m still trying to find out myself.” You should the surprise look on their faces.

So, I believe there are more classical economists yet to emerge on the debating scene, Tommy!

And now Thomas Humphrey has re-entered, who is himself in many ways one of us:

Steve,

My sincerest apologies for the oversight. I agree that there exist today more than one, and perhaps a sizable number of, classical economists, you being prominent among them.

And it was not the classical theory of distribution and growth, which, as you say, still has much going for it, that I was referring to. On the contrary, I’m a fan of Smithian and Ricardian distribution and growth theory. Rather I was referring to classical monetary theory, some of whose doctrines (but certainly not all, quantity theory and price-specie-flow ideas especially) have, it seems to me, been rendered obsolete, marginalized, and superseded by Chester Phillips-James Mead demand-deposit expansion analysis as well as by Keynesian, New Keynesian, and Post Keynesian doctrines.

I realize that you, as a major critic of Keynes and Keynesianism, will dispute all this. And you may be right in doing so. I’m just enunciating one view, namely my own and others like mine. In the spirit of letting a thousand flowers bloom, I hope you will indulge us even as you disapprove. That’s the beauty of doctrinal-historical conversations. They are willing to tolerate different views.

I might well dispute what Thomas wrote but it is a major advance even to see “Smithian and Ricardian distribution and growth theory” mentioned in a positive light. And to find Wicksell discussed, whichever side one might be on, is a return to some of the important debates of the past that have major implications today. And I do think James is right that it has taken three generations for economists to become brave enough to identify with pre-Keynesian economics which up until recently has been a no-go area for anyone interested in a career in economics, specially an academic career. But things are changing and it is very pleasing to see these shoots beginning to come up.

Explaining Hayek’s logic

This was posted today on the Societies for the History of Economics (SHOE) website:

Can someone explain Hayek’s (1978) logic:

“I have just published an article in the London Times on the effect of trade unions generally. It contains a short paragraph just pointing out that one of the effects of high wages leading to unemployment is that it forces capitalists to use their capital in a form where they will employ little labor. I now see from the reaction that it’s still a completely new argument to most of the people. [laughter]”

In further explanation of his puzzlement, he pointed out that this makes no sense using marginal productivity theory since everything else will re-adjust to create full employment so what was Hayek trying to say. I therefore gave my explanation which followed behind another explanation given by James Ahiakpor, the only other modern day relentlessly anti-Keynesian economist I know of, but this is from me:

In Australia where I was involved in our National Wage Cases on behalf of employers, there was an argument we continually had to deal with which came from the bench and not the unions. It was that raising wages would be good for the economy since it would force businesses to become more capital intensive. The assumption here was that the higher productivity forced on employers would lead to increases in the economy’s ability to finance the higher real wage being imposed.

Marginal productivity theory is part of micro and will tell you what an individual firm will do in the face of higher real labour costs. It does not, however, tell you what will happen across the economy. Forcing real wages higher than the underlying productivity of the economy will support will drive some people out of work. This seems to me so obvious that both then and now it leaves me nonplussed to see it even mentioned, but then I, like James, think about these questions using classical forms of analysis. Unfortunately, like Hayek said, it still seems to be a completely new argument to most people.

The only difference between myself and James is that I would send you to Mill rather than Ricardo.