Piketty and the Crisis of Neoclassical Economics

By Foster, John Bellamy; Yates, Michael D. | Monthly Review, November 2014 | Go to article overview

Piketty and the Crisis of Neoclassical Economics


Foster, John Bellamy, Yates, Michael D., Monthly Review


Not since the Great Depression of the 1930s has it been so apparent that the core capitalist economies are experiencing secular stagnation, characterized by slow growth, rising unemployment and underemployment, and idle productive capacity. Consequently, mainstream economics is finally beginning to recognize the economic stagnation tendency that has long been a focus in these pages, although it has yet to develop a coherent analysis of the phenomenon.* 1 Accompanying the long-term decline in the growth trend has been an extraordinary increase in economic inequality, which one of us labeled "The Great Inequality," and which has recently been dramatized by the publication of French economist Thomas Piketty's Capital in the Twenty-First Century.2 Taken together, these two realities of deepening stagnation and growing inequality have created a severe crisis for orthodox (or neoclassical) economics.

To understand the nature of this crisis of received economics it is necessary to look at the two principal bulwarks of neoclassical theory, which were originally erected in response to socialist critics. The first is the notion that a freely competitive capitalist economy left to itself generates full employment, indicating that unemployment is the product of various frictions, imperfections, or government interference. The second is the related proposition that income and wealth inequality are determined by the "marginal productivity" (or relative contributions to output) of the various factors of production, chiefly capital and labor-a logic that is extended to the contributions of individuals themselves. The renowned post-Second World War national income statistician, Simon Kuznets, in his famous Kuznets Curve, even argued that there was a tendency in developed capitalist economies towards a decrease in inequality, due to the effects of modernization, including enhanced educational opportunities.3

Contrast these propositions to the reality of the mature capitalist economies today. Far from a full-employment equilibrium, what we see rather is a long-term tendency to economic stagnation. Moreover, this reality describes all of the developed capitalist economies and can be seen in a trend going back forty years, or indeed longer.4 Over roughly the same period, income and wealth levels, rather than converging, have diverged sharply-a divergence that cannot be attributed to differences in education and skill, nor to the contributions of capital relative to labor.5 In short, both of the principal justifications for the system provided by neoclassical economics have collapsed before our eyes.6

The first of these fissures in the outlook of neoclassical economics is long-standing and well known. During the Great Depression, unemployment in the United States rose at its height in 1933 to 25 percent. It was in this context that John Maynard Keynes, the intellectual heir to Alfred Marshall at Cambridge University, and hence one of the principal figures in neoclassical economics, broke partially with the economic orthodoxy with the publication of his magnum opus, The General Theory of Employment, Interest and Money in 1936. Keynes sent mainstream economics into a tailspin by attacking (as had Marx earlier) the notion of Say's Law of classical economics, which postulated that supply creates its own demand.7 He thus engaged in a frontal assault on the notion that full-employment equilibrium was an inherent tendency of the system. Instead Keynes contended, "When effective demand is deficient there is under-employment of labour in the sense that there are men who are unemployed who would be willing to work at less than the existing real wage."8 Nor was this an unusual circumstance under capitalism; mass underemployment in this sense was the normal condition in rich capitalist economies. As John Kenneth Galbraith summed up Keynes's heresy in The Age of Uncertainty:

Keynes's basic conclusion can...be put very directly. Previously it had been held that the economic system, any capitalist system, found its equilibrium at full employment. …

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