Wynne Godley on neoclassical prejudices

9 Aug, 2014 at 11:39 | Posted in Economics | Comments Off on Wynne Godley on neoclassical prejudices

I have reached a point when I am prepared to make a declaration. I want to say of neoclassical macroeconomics what I have said sometimes of certain kind of fiction; I know that the world is not like that and I have no need to imagine that it is. In particular, I do not believe that there exists a market in which goods in aggregate and labour in aggregate can be exchanged provided only that the price of each is right in relation to some given stock of ‘money’.

godley2But my objection goes beyond skepticism that the world we live in is being described realistically. My additional concern is that the neoclassical paradigm is prejudicial with regard to the understanding of some of the most important processes going on in the world today. Thus in the ‘classical’ version of the neoclassical paradigm real output is determined by supply side alone; fiscal policy is entirely impotent and the government can only affect anything by changing the money supply; even then all it can do is affect the price level. The idea that fiscal policy is impotent, which seems to be based entirely on this model, has been extremely influential in contemporary political discussion; it is not just a provisional result suitable for a week or two in an elementary class.

Then the abolition of time prejudices the perception of inflation as an evolutionary process; the equilibria generate ‘explanations’ of price levels not changes, and theories of inflation cannot be convincingly coaxed forth. As if this were not enough, the whole construction leads by virtue of its axioms to the conclusion that wage and price flexibility, in combination with free trade, will generate full employment and convergence, if not equalisation, of living standards between countries and between regions within countries. In sum, while the absence of processes occuring in historical time means that the neoclassical paradigm does not encourage students to go and look up figures in books, if and when they are forced to do so their vision is likely to have been for ever distorted.

Wynne Godley

[h/t Jan Milch]

Blog at WordPress.com.
Entries and comments feeds.