Tuesday, February 17, 2009

Two Crises Of Economic Theory

The American Economic Association held their annual meeting in New Orleans in 1971. At the invitation of John Kenneth Galbraith, the AEA president that year, Joan Robinson delivered the keynote Ely address. She identified "The Second Crisis of Economic Theory".

The first crisis occurred in the 1930s. Economists had no theory, at the time, to guide policy for addressing the dramatic drop in the volume of output and the increase in unemployment. John Maynard Keynes, as well as Michal Kalecki, developed the theory to address this crisis.

As I recall, the second crisis of economic theory relates to the mix of goods being produced, even when the volume is such that more-or-less full employment is being achieved. Many of her time did not think the balance correct. Conspicuous consumption, positional goods, and the means of destruction are produced in abundance. But as for the production of amenities useful for modern life typically provided by government (e.g., public transportation) - not so much. Mainstream economic theory does not provide a perspective for a thorough-going improvement on what comes out of more-or-less capitalist markets.

Consider the context of Robinson's Ely lecture. Although she had already developed a theory of stagflation, she couldn't have known how poor western economies would perform over the next decades. So at the time of her lecture, the second crisis of economic theory might have been more readily apparent than the first.

It seems to me that both crises are evident today. The world's economic problems are not only how to get people back to work during this worldwide global downturn. We also need to reorient the world's economy to operate with more sustainable and renewable energy resources, encourage the production of more public goods in many economies, decrease the workweek, etc.

  • Joan Robinson (1972) "The Second Crisis of Economic Theory", American Economic Review, Papers and Proceedings, V. 62 (May): 1-10

1 comment:

Pete Murphy said...

Regarding your last paragraph, you may be interested in a new economic theory that relates falling per capita consumption to population density which rises beyond some "optimum" level. Falling per capita consumption, in the face of rising productivity, inevitably yields rising unemployment and poverty. It's this relationship that makes overpopulated nations (like China, Japan, Germany and Korea to name just a few) utterly dependent on exports to sustain their vast labor forces and just as dependent on other nations (like the U.S.) to sustain enormous trade deficits, setting up the imbalance in the global economy that has led to its collapse.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)

Please forgive me for the somewhat spammish nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

Pete Murphy
Author, "Five Short Blasts"