Academic journal article
By Wrenn, Mary; Stanfield, James Ronald; Carroll, Michael
Journal of Economic Issues , Vol. 42, No. 1
John Kenneth Galbraith was a giant public intellectual in the second half of the 20th Century. (1) His place in intellectual history is secure. His was a critical voice in a time of complacency, a complacency that proved to be as fragile as he suggested. The long ascendant modern liberal attitude gave way to a recrudescence of classical liberalism, a strain that has come to be known as neoliberalism. (2) So, though his stature alone affords credibility to attending to his ideas, there is further reason to do so. It is useful to examine the intellectual context from which the neoliberal Great Capitalist Restoration arose. Such an exercise in the history of economic thought and methodology is an important part of the ethnography of our modern/post-modern age. Compiling this period record should be of particular interest to heterodox economists, especially those who regard neoliberalism as a dangerous anachronism.
One part of this exercise is to reset the context from which the Great Capitalist Restoration emerged. We seek to contribute in this regard by attention to the critical commentary of Galbraith and Joan Robinson. Robinson warned of a worsening and dangerous "second crisis" of economic theory and Galbraith issued monitory lamentations about the neglect by conventional economic opinion of crucial political economic concerns. (3) In the following we suggest there is yet much to learn from Robinson's and Galbraith's messages on the eve of the rise of neoliberalism.
Robinson's Second Crisis of Economic Theory
Joan Robinson lamented the "second crisis" of economic theory and challenged economists to come to grips with it in her Richard T. Ely lecture to the American Economic Association (AEA) in December 1971. The first crisis, made manifest by interwar mass unemployment, had been resolved in part by the Keynesian Revolution. Portentously, the massive state expenditures of World War II demonstrated the efficacy of Keynes's contention that fiscal policy could effectively overcome mass unemployment. Thereafter, the conventional modern liberal wisdom came to affirm the use of fiscal policy to maintain output near its potential level. Indeed, professional opinion went beyond what had been demonstrated and asserted that fiscal policy could be used to offset inadequate aggregate demand in situations of unemployment well short of the massive interwar levels. There arose the notion of fine-tuning the macroeconomy and by 1970 there was serious discussion as to the possible obsolescence of the business cycle (Bronfenbrenner 1969). The conventional wisdom in question came to be called neo-Keynesian economics and it embodied the Keynes-Samuelson neoclassical synthesis in which Keynes's macroeconomic ideas were retrofitted into the neoclassical microeconomic framework. (4)
In any event, the disciplinary norm became high or full employment achieved by aggregate demand policy coupled with confidence in markets to allocate these highly or fully employed resources. Little theoretical attention was paid to the supply side of the economy, as one would expect, given the emphasis on automatic micro market forces. There was some concern about inflation and economic structure was seen to set the tradeoff terms on which society could choose its levels of price change and unemployment. Theoretical attention was paid to externalities and some policy implications were drawn regarding human capital formation and pollution, but little was said about economic structure with regard to macroeconomic stabilization.
In this context, and on the eve of the stagflation that was to fatally undermine neo-Keynesian complacency, Robinson argued that economics had come to face a second theoretical crisis. The first crisis had not been adequately resolved because the Keynesian Revolution was incomplete, and this incomplete character foreshadowed the second crisis. In her view, Keynes makes sense only in a real world, real time context in which the past is irrevocable and the future unknown (Robinson 1972, 3). …