Launch of “Political Economy Now!”

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In May 1973, dis­sat­is­fac­tion over the teach­ing of eco­nom­ics at the Uni­ver­si­ty of Syd­ney went from a fes­ter­ing sore amongst the staff only to an out­right revolt by a minor­i­ty of the staff, and a major­i­ty of the stu­dents.  In 1975, a new Depart­ment of Polit­i­cal Econ­o­my had its first intake into Eco­nom­ics I℗. Thir­ty four years lat­er, it is still going. Pro­fes­sor Frank Stil­well, who has lived this dis­pute since 1970, is launch­ing Polit­i­cal Econ­o­my Now!, a his­to­ry of the dis­pute, next Tues­day at Syd­ney Uni­ver­si­ty’s Fish­er Library (May 5th, 5.30pm, Lev­el 5).

I was one of those “revolt­ing” stu­dents in 1973, hav­ing become dis­en­chant­ed with neo­clas­si­cal economics–before I even knew to call it that–in the mid­dle of my first under­grad­u­ate year in 1971.

A major impe­tus here, as I note in Debunk­ing Eco­nom­ics, was a lec­ture by the then new­ly appoint­ed Dr Frank Stil­well which explained a con­cept known as the “the­o­ry of the sec­ond best”. Devel­oped in the 1950s by Cana­di­an econ­o­mist Richard Lipsey and Aus­tralian-Amer­i­can econ­o­mist Kelvin Lan­cast­er, this the­o­ry argued that a sin­gle move­ment clos­er to what eco­nom­ic the­o­ry described as a bet­ter world could in fact reduce wel­fare rather than increas­ing it (Lipsey, R. G. and K. Lan­cast­er (1956). “The Gen­er­al The­o­ry of Sec­ond Best.” The Review of Eco­nom­ic Stud­ies 24(1): 11–32).

Frank’s expla­na­tion of the the­o­ry involved a labour mar­ket in which a monop­oly sup­pli­er of labour (a trade union) was nego­ti­at­ing with a con­cen­trat­ed buy­er of labour (a major firm or per­haps an oli­gop­o­lis­tic car­tel). Unqual­i­fied neo­clas­si­cal eco­nom­ics argued that the trade union would reduce wel­fare by forc­ing employ­ers to pay a wage that exceed­ed the (mar­gin­al) pro­duc­tiv­i­ty of the work­ers.  Wel­fare would there­fore be increased if the union was abolished–and this argu­ment is the major rea­son that neo­clas­si­cal econ­o­mists are so gen­er­al­ly anti-union.

But Frank point­ed out that the same mod­el that argued that trade unions alone would set wages “too high”–compared to the neo­clas­si­cal mea­sure of social welfare–led to the con­clu­sion that a monop­oly buy­er  (or “monop­sony”) of labour fac­ing dis­or­gan­ised work­ers would result in wages that were “too low” com­pared to that same mea­sure. On the oth­er hand, with both unions and monop­sony buy­ers of labour present, the wage would end up some­where between these two extremes.

So abol­ish­ing the union–or dras­ti­cal­ly weak­en­ing its capac­i­ty to bar­gain while doing noth­ing to reduce the pow­er of the buy­ers of labour–would actu­al­ly reduce wel­fare. The stan­dard anti-union line that many neo­clas­si­cal econ­o­mists (and con­ser­v­a­tive politi­cians influ­enced by them) trot out is there­fore not sup­port­ed by a more gen­er­al neo­clas­si­cal per­spec­tive.

This caveat to the stan­dard “Eco­nom­ics 101” anti-union posi­tion is not some­thing that stu­dents nor­mal­ly encounter until well into their Hon­ours or even PhD edu­ca­tion. By then, most stu­dents who have delved that deeply into the neo­clas­si­cal mind­set can’t see any oth­er way to think about the econ­o­my. They either ignore “curlies” like this one (and many, many oth­ers), or they take the zealot’s approach (“we should abol­ish monop­o­lies as well–hey, let’s form a Con­sumer and Com­pe­ti­tion Com­mis­sion to cam­paign for just that”), or they accept patent­ly absurd assump­tions to side­step obvi­ous prob­lems in apply­ing neo­clas­si­cal eco­nom­ic the­o­ry to the real world.

Hav­ing learnt this par­tic­u­lar curly “out of sequence”, I was instead struck with how frag­ile the the­o­ry was: admit one aspect of reality–that there are both unions and con­cen­trat­ed buy­ers of labour–and a straight­for­ward propo­si­tion from the the­o­ry is turned on its head. That did­n’t strike me as a par­tic­u­lar­ly robust the­o­ry: a robust one would instead need just some atten­u­a­tion of its con­clu­sions as more real­ism was intro­duced, not a whole­sale “Do the oppo­site of the advice giv­en in the sim­plest case if its con­di­tions don’t apply pre­cise­ly in the real world”.

My dis­en­chant­ment with eco­nom­ic the­o­ry grew as I learnt more, so that I dropped out of the Hon­ours stream in sec­ond year, and ulti­mate­ly played a lead­ing role in the dis­pute that erupt­ed in 1973. At the year’s end, I was one of two stu­dents who were invit­ed to address the Fac­ul­ty of Eco­nom­ics when it met to con­sid­er whether there should be an Inquiry into the Depart­ment of Eco­nom­ics (the oth­er was Richard Osborne).

Despite our vic­to­ry at Syd­ney Uni­ver­si­ty, neo­clas­si­cal eco­nom­ics grew even more dom­i­nant as the years wore on, some­thing that both per­plexed and wor­ried me (and many oth­ers who devel­oped a career in aca­d­e­m­ic eco­nom­ics while refus­ing to wor­ship at the neo­clas­si­cal altar). How could some­thing so wrong be so suc­cess­ful? We knew that the grounds on which its many inter­ven­tions in pub­lic policy–from com­pe­ti­tion pol­i­cy to indus­tri­al rela­tions to macro­eco­nom­ic man­age­ment and mon­e­tary policy–were shon­ky. How come the econ­o­my nonethe­less seemed to be boom­ing?

The answer, as is now becom­ing obvi­ous to every­one except diehard neo­clas­si­cal econ­o­mists, was that under­ly­ing this appar­ent eco­nom­ic pros­per­i­ty was a grow­ing pile of debt. Eco­nom­ic pros­per­i­ty now was being bor­rowed from the future, as a moun­tain of debt was accu­mu­lat­ed, and the mon­ey gen­er­at­ed by it spent on an orgy of spec­u­la­tion on share and prop­er­ty mar­kets.

For­tu­nate­ly, as well as reject­ing neo­clas­si­cal eco­nom­ics, I had also become a fan of Hyman Min­sky’s “finan­cial insta­bil­i­ty hypoth­e­sis”. In my PhD I con­struct­ed biol­o­gy and engi­neer­ing-inspired math­e­mat­i­cal mod­els of Min­sky’s hypoth­e­sis that, unfor­tu­nate­ly, proved to be very accu­rate pre­dic­tors of what the ulti­mate out­come of this spec­u­la­tive bub­ble would be.

In doing this work, I have moved light years away from neo­clas­si­cal eco­nom­ics, but also some dis­tance from what Polit­i­cal Econ­o­my has become. The faux-math­e­mat­ics prac­ticed by neo­clas­si­cal eco­nom­ics per­suad­ed a lot of crit­ics that math­e­mat­ics was part of the prob­lem, but I was always of the mind that neo­clas­si­cal eco­nom­ics either used the wrong mathematics–algebra and com­par­a­tive sta­t­ics ver­sus dif­fer­en­tial equa­tions and dynam­ic analysis–or made math­e­mat­i­cal errors, or both. Since Polit­i­cal Econ­o­my has shied away from math­e­mat­ics, I there­fore stand some­what out­side my old stamp­ing ground these days.

But I would­n’t be who I am, nor could I have made the con­tri­bu­tions that I have to eco­nom­ics, with­out those begin­nings in the stir­ring days of the ear­ly 1970s. So I owe a great debt to Polit­i­cal Econ­o­my at Syd­ney Uni­ver­si­ty, one I am hap­py to acknowl­edge.

Unfor­tu­nate­ly, I won’t be able to attend the book launch next week–I am already com­mit­ted to attend­ing a work­shop with the CSIRO on meld­ing dynam­ic mod­els of the ecol­o­gy with the same from eco­nom­ics. But I’ll be there in spir­it as Frank Stil­well, Evan Jones, Gavan But­ler and many “once-were-activists” ex-stu­dents com­mem­o­rate a proud entry in the lar­rikin his­to­ry of Aus­tralian eco­nom­ics. If you’re inter­est­ed in the sto­ry, and espe­cial­ly if you were part of it, see if you can make it along to the launch:

  • Loca­tion: Syney Uni­ver­si­ty Fish­er Library, Lev­el 5
  • Date: Tues­day May 5th
  • RSVP: by Fri­day 1 May 2009 to or 02 9036 9958
  • Start Time: 17:30

Frank invit­ed myself and sev­er­al oth­er lead­ing activists from that time to write some reflec­tions on Polit­i­cal Econ­o­my for the book.  My entry is repro­duced below.

From Activist to Associate Professor…

Like many of those who got involved in the Polit­i­cal Econ­o­my strug­gle at Syd­ney Uni­ver­si­ty, I began as a believ­er in what I sim­ply thought was eco­nom­ics. There is a first year tuto­r­i­al paper, hope­ful­ly long lost, in which I bemoan the exis­tence of both monop­o­lies and trade unions.

Such naivety did not last. In late 1971, one Frank Stil­well drove an intel­lec­tu­al bull­doz­er through it with an untime­ly illus­tra­tion dur­ing a First Year of the “the­o­ry of the sec­ond best” (in a “prop­er” eco­nom­ics edu­ca­tion, such things are real­ly best left to grad­u­ate school when the few sur­vivors are ful­ly com­mit­ted to neo­clas­sisicm). Learn­ing about this wrin­kle on the seem­ing­ly flaw­less neo­clas­si­cal skin shook my world view sub­stan­tial­ly (with a lit­tle bit of help from the Viet­nam Mora­to­ri­um), and the sec­ond thing I did after sign­ing on for a vaca­tion job was to join the union.

The fol­low­ing year, along with a new­found rad­i­cal friend Richard Fields, I organ­ised (if that is the right word!) a “Rad­i­cal Eco­nom­ics” con­fer­ence. It was attend­ed by a hand­ful, with the Hen­ry George League mak­ing up a size­able frac­tion of the audi­ence and only Bruce McFar­lane pro­vid­ing any real intel­lec­tu­al spark.

As my “gut-feel­ing” dis­gust for eco­nom­ics grew, I became pro­gres­sive­ly more dis­il­lu­sioned both with eco­nom­ics and with the bulk of my fel­low stu­dents, who seemed to tol­er­ate this bunk (though they, like me, chat­ted away all through Pro­fes­sor Simkin’s incred­i­bly bor­ing 2nd Year Macro­eco­nom­ics lec­tures). Attempts to chal­lenge the staff on the “hid­den assump­tions” of eco­nom­ics met with friend­ship from a minor­i­ty who would, some time lat­er, form the nucle­us of the Polit­i­cal Econ­o­my Depart­ment, but out­right hos­til­i­ty from the major­i­ty (notably the main 1st Year Micro­eco­nom­ics lec­tur­er, whom we had long ago nick­named Mean Mr Mus­tard Man after his pecu­liar taste in cloth­ing). It seemed that this mediocre hege­mo­ny — that I now knew to call “neo­clas­si­cal” — would for­ev­er dom­i­nate eco­nom­ics for­ev­er.

All that changed in 1973, when the Phi­los­o­phy Depart­ment at Syd­ney Uni­ver­si­ty ini­ti­at­ed a strike over the University’s refusal to endorse a new sub­ject on “Philo­soph­i­cal Aspects of Fem­i­nist Thought”. As then Pres­i­dent of the Arts Soci­ety (my degree was Arts/Law, not Eco­nom­ics) and there­fore an ex-offi­cio mem­ber of the Fac­ul­ty of Arts, I took an active role in this at both offi­cial and street protest lev­el, and found the vigour of the Phi­los­o­phy stu­dents a wel­come con­trast to the pas­siv­i­ty I thought char­ac­terised their Eco­nom­ic col­leagues.

All this changed when Gavan But­ler informed me that stu­dents in Frank’s 1st Year lec­ture had vot­ed to strike in sym­pa­thy with Phi­los­o­phy. The aura of pas­siv­i­ty had only been one of res­ig­na­tion: like me, many were fed up with the pseu­do-numer­ate non­sense that per­me­at­ed our sub­jects, and leapt at the chance to do some­thing to change it.

A lunchtime meet­ing about “The Prob­lem in Eco­nom­ics” drew over 450 stu­dents. While we rant­ed, lit­tle direc­tion exist­ed until an until-then unknown Gov­ern­ment stu­dent, Richard Osborne, sprang to his feet to sug­gest that we should organ­ise a “Day of Protest”. Over ten per cent of the audi­ence vol­un­teered to help, and though we didn’t quite realise it then, the Polit­i­cal Econ­o­my Move­ment was born.

The Day of Protest was a huge suc­cess from the moment that Bill Nichol’s 25 metre ban­ner was strung out across the Merewether Build­ing. The adren­a­lin rush of the event gave our protest a momen­tum that pushed through a Fac­ul­ty vote to inves­ti­gate the affairs of the Depart­ment of Eco­nom­ics. We also devel­oped an alter­na­tive eco­nom­ics cur­ricu­lum that became Polit­i­cal Econ­o­my I (in response to a chal­lenge from Pro­fes­sor Hogan to “do bet­ter”  if we didn’t like the cur­rent syl­labus). And, though we didn’t appre­ci­ate it at the time, we gave birth to a tra­di­tion of stu­dent activism that, while it has waxed and waned at times, has lived on for ful­ly thir­ty years. That is a remark­able achieve­ment.

Look­ing back on those days from my posi­tion as an Asso­ciate Pro­fes­sor of Eco­nom­ics & Finance, I think we did only one thing wrong. Because so much of the non­sense of neo­clas­si­cal eco­nom­ics is dressed up in appar­ent­ly sophis­ti­cat­ed math­e­mat­i­cal dress, we iden­ti­fied math­e­mat­ics and rig­or­ous analy­sis as at least part of “the ene­my”.

Know­ing what I know today, I realise that it was not real math­e­mat­ics but appalling­ly bad math­e­mat­ics that clothed this naked emper­or of the social sci­ences. It of course remains true that much of eco­nom­ics can­not be put into math­e­mat­i­cal form, as Hugh Stretton’s Eco­nom­ics makes clear with its plea for “bare­foot econ­o­mists”. But tru­ly rig­or­ous math­e­mat­ics demol­ish­es neo­clas­si­cal eco­nom­ics, while mod­ern math­e­mat­ics and com­put­ing offer the pos­si­bil­i­ty of a tru­ly dynam­ic eco­nom­ics that can at least par­tial­ly explain the behav­iour of the unsta­ble eco­nom­ic sys­tem in which we live.

Thir­ty years on, the bat­tle to devel­op that real eco­nom­ics is still an uphill one. The major­i­ty of econ­o­mists still fall prey to the seduc­tive ide­ol­o­gy of neo­clas­si­cism, while only a hand­ful of the per­haps 20 per cent of aca­d­e­m­ic econ­o­mists who are non-neo­clas­si­cal have the intel­lec­tu­al armory need­ed to devel­op an alter­na­tive. They strug­gle on with lim­it­ed fund­ing while com­par­a­tive abun­dance is wast­ed on those who con­tin­ue to push the pre­vail­ing par­a­digm for­ward.

So is the PE strug­gle ulti­mate­ly futile? No: we know so much more now about the defi­cien­cies of neo­clas­si­cal eco­nom­ics than we knew thir­ty years ago, and per­haps eco­nom­ic cir­cum­stances will one day give us the oppor­tu­ni­ty to shake the hege­mo­ny as Keynes tried to do sev­en­ty years ago. Until that day, we can at least rev­el in pok­ing fun at the naked emper­or.

A footnote: How true that last paragraph turned out to be

Upon re-read­ing that last paragraph–“perhaps eco­nom­ic cir­cum­stances will one day give us the oppor­tu­ni­ty to shake the hege­mo­ny as Keynes tried to do sev­en­ty years ago”–I was curi­ous about when I could have writ­ten it.

Some books take a long time to go from idea to hard copy: I penned those lines on Jan­u­ary 1st 2003.

The state­ment itself under­scores why this strug­gle was and is impor­tant, and why also it had no chance of suc­cess until the econ­o­my itself was in cri­sis. Though there were plen­ty of anti-cap­i­tal­ist rad­i­cal amongst those who cam­pained for Polit­i­cal Econ­o­my, the uni­fy­ing theme of the move­ment was that neo­clas­si­cal eco­nom­ics was bad the­o­ry. Just as fol­low­ing a bad the­o­ry of navigation–such as Ptole­my’s earth-cen­tric view of the universe–can lead a ship into dis­as­ter, fol­low­ing bad eco­nom­ic the­o­ry ulti­mate­ly had to lead to an eco­nom­ic calami­ty.

But just as it’s hard to con­vince a believ­er that the earth-cen­tric mod­el of the uni­verse is false until his ship is wrecked on a reef that his mod­el says was­n’t there, we could­n’t con­vince the wider world of the errors in neo­clas­si­cal thought until the econ­o­my itself was in cri­sis. We have now hit that eco­nom­ic reef, and there­fore the oppor­tu­ni­ty to reform eco­nom­ics is final­ly with us.

It is an oppor­tu­ni­ty that I have no inten­tion of wasting–hence the for­ma­tion of this blog, and the pub­lic infor­ma­tion and pol­i­cy cam­paign I have waged over debt. But it’s one that could pass us by too, as it did in the 1930s, when Key­nes’s attempt to refor­mu­late eco­nom­ics with­out Say’s Law was under­mined by Hick­s’s rein­ter­pre­ta­tion of Keynes as a neo­clas­si­cal “mar­gin­al­ist”. Aca­d­e­m­ic eco­nom­ics is incred­i­bly resis­tant to reform, and left to their own devices, eco­nom­ics depart­ments will go on teach­ing neo­clas­si­cal eco­nom­ics and attempt to devel­op “a neo­clas­si­cal Min­sky” as they once con­coct­ed “a neo­clas­si­cal Keynes”.

There can be no such crea­ture. Essen­tial aspects of Min­sky’s theory–especially his direct incor­po­ra­tion of uncer­tain­ty, and his vision of desta­bil­is­ing forces so that no equi­lib­ri­um will ever persist–are utter­ly anti­thet­i­cal to the neo­clas­si­cal way of think­ing. But I have no doubt that there will be attempts to refor­mu­late his ideas in a neo­clas­si­cal guise.

For that rea­son, my main argu­ment for the reform of aca­d­e­m­ic econ­o­mists is to remove the monop­oly that eco­nom­ics depart­ments cur­rent­ly have over the word “eco­nom­ics”. Let Engi­neer­ing and Physics and Biol­o­gy and Soci­ol­o­gy and Psy­chol­o­gy depart­ments teach Eco­nom­ics as well–and label it as such. With their very dif­fer­ent foun­da­tions, there is a prospect that in those cours­es a new, real­is­tic, dynam­ic approach to eco­nom­ics will final­ly evolve.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.