A Third Way

The post title could refer to a third alternative. It has been years since I read Dutt and Amadeo's book. Their title is taken from a Keynes' quotation:

"Those, who are strongly wedded to what I shall call 'the [neo]classical theory', will fluctuate, I expect, between a belief that I am quite wrong and a belief that I am saying nothing new. It is for others to determine if either of these or the third alternative is right." -- John Maynard Keynes, The General Theory of Employment Interest and Money

In politics, the "third way" is used to refer to another possibility between a laissez-faire night watchman state and Stalinist central planning. The failure of "actually existing socialism" does not imply "there is no alternative." The third way takes in a lot of possibilities. I think Sweden was referred to decades ago as embodying a third way. Likewise, the label is used to refer to ideas associated with Tony Blair and Bill Clinton. (I have not read Giddens.)

Cambridge-Italian economists constitute a school of thought within economics. They have a constructive agenda - to demonstrate an integration of classical political economy with Keynes' theory. Classical political economy refers to the approach of, for example, Adam Smith and David Ricardo. Keynes himself envisioned what he called a "monetary theory of production."

Heinrich Bortis has argued that this classical-Keynesian political economy is the socioeconomic theory of the third way. "In the Keynesian third-way view there is no automatic co-ordination of individual actions." And, he argues, the destructive criticism developed in the Cambridge Capital Controversy fits into this argument:

"...Specifically, it must be shown that under ideal conditions, i.e. perfect competition and absence of disturbing elements like uncertainty and money, one or more markets do not function properly so that, even in the long run, no tendency towards full employment exists: the problem is not about possible market failures, but about principles.

This task has been accomplished by the capital-theory debate, the main economic implications of which are set out in Garegnani (1970), Kurz (1985) and Pasinetti (1974, pp. 132-42; 1977, pp. 169-77); a comprehensive and easily understandable presentation of the crucial issues is Harcourt (1972).

...As a consequence, no regular (downward-sloping) associations between profit rates, on the one hand, and capital and output per worker and the capital-output ratio, on the other hand, exist. These relationships are, in fact, totally irregular. Since the 'capital market' does not function in the neoclassical sense and since factor markets are supposed to be interrelated, regular long-period relationships between 'factor prices' and 'factor quantities' cannot exist in general, i.e. there are no 'factor markets' at all if the long run is considered. This is the main result of the capital-theory debate...

...The fact that there are no regular relationships between 'factor prices' and 'factor quantities' is extremely damaging for equilibrium theory: the market cannot produce a tendency towards some postulated long-period equilibrium to solve the central economic problems, i.e. value, distribution and employment....

...These references to the history of the capital-theoretic discussion show that it is a discussion about fundamentals. The basic question is whether there are regular relationships between 'factor prices' and 'factor quantities' or not, i.e. normally functioning factor markets. Examining this question seriously will inevitably shape an economist's vision in a decisive way. The capital-theoretic debate is a theoretic watershed dividing two different views of looking at socioeconomic phenomena, i.e. neoclassical equilibrium theory which emphasizes behavior and classical-Keynesian political economy which starts from the functioning of the socioeconomic system, the question being which approach is more appropriate to tackle fundamental socioeconomic problems, such as value, distribution and employment. Therefore, as Geoffrey Harcourt was one of the first to perceive, the Cambridge controversies are 'not merely about the measurement of capital...but about the scientific status of neoclassical (equilibrium) theory' (Dixon 1988, pp. 251-2)...." -- Heinrich Bortis, Institutions, Behaviour and Economic Theory: A Contribution to Classical-Keynesian Political Economy (1996)