12.1 – Introduction to a Heterodox Macroeconomic Perspective
The Importance of Ideas
The history of economic ideas has a long tradition dating back thousands of years. For example, long prior to the existence of market capitalist economies, thinkers such as Aristotle, residing in ancient Greece during the 4th century BCE, hypothesized about the ideal way to organize economic activity. The vital nature of economic organization to the health and well-being of the larger social edifice has historically been a topic of central concern.
As market capitalist economies evolved and came into existence, the desire to understand the nature of market driven economic organization, and its social impact, has not lost its importance. The essential features of a capitalist market economy, its organizing principles, stability and/or instability, dynamism, environmental and ecological impact, and its ability to both positively and negatively impact material well-being, have drawn the interest of a multitude of thinkers.
Within the context of examining capitalist market economies, some ideas have found a wide acceptance and have been successfully reproduced for a broad audience. These ideas of widespread influence tend to reside typically within the orthodox economic perspective. However, widely known or commonly accepted ideas are not necessarily the only ideas of significance. Many times, there are alternative perspectives, while oftentimes marginalized for reasons outside of their insightfulness, that provide an alternative to the orthodox economic explanation of the conditions of capitalist market economies. These lesser known but often extremely important ideas are identified as residing within the heterodox economic tradition.
Chapter Objectives
In this chapter, you will learn about:
- The original Keynesian argument
- Keynes’ law that demand creates its own supply.
- Less than full employment equilibrium.
- The Keynesian Cross Analysis
- The Policy Implications of the original Keynesian Perspective
In most modern introductory economics textbooks, any debate about macroeconomic theory and its relation to appropriate macroeconomic policies typically boils down to a discussion of the main differences within the orthodox perspective, the neoclassical and the New Keynesian arguments. The outcome of the debate centers around the idea that the New Keynesian story belongs in the short run and the neoclassical story is about the long run. As is often the case, the application of New Keynesian ideas are presented as a relatively benign social choice as opposed to a necessary action.
Importantly, both of the orthodox arguments are, at their core, laissez-faire oriented arguments. The belief is that capitalist market economies under conditions of limited governmental oversight, whether it is regulatory or fiscal and monetary policies, will in the long run gravitate to a full resource utilization (full employment) outcome that also includes a stable overall price level.
The purpose of this chapter will be to argue that the orthodox macroeconomic perspective is a specific and narrow view of possible macroeconomic conditions in a capitalist market economy. Throughout the sweep of economic ideas presented across the history of economic thought, a multitude of alternative perspectives have articulated positions counter to the orthodox argument. These alternative ideas, residing outside of orthodox economic thought, are often collectively categorized as heterodox economic ideas. Because there are far more heterodox ideas than adequate space available in a singular chapter to describe all of these ideas, this chapter will choose to focus on the original (old) Keynesian ideas as presented by John Maynard Keynes in his 1936 book, The General Theory of Employment, Interest, and Money.
The original perspective of John Maynard Keynes provides an overview of a macroeconomy that is decidedly different from the orthodox perspective in at least five different ways. First, the original Keynesian view of wages and prices differs from both the orthodox perspective (the neoclassical as well as the new Keynesian positions).
Second, the different view of wages and prices, coupled with Keynes’ emphasis on the volatility of effective demand (aggregate demand) will turn Say’s law on its head as well as the well-functioning market vision of macroeconomics presented by the orthodox approach.
Third, merging a possible lack of effective demand with the absence of the wage and price equilibrating mechanism, Keynes’ original insights suggest the possibility of market capitalist economies experiencing common and persistent less than full employment equilibria.
Fourth, given persistent less than full employment, Keynes suggested the need for regular utilization of activist government policies, fiscal and monetary, in an effort to guide economic outcomes toward full employment and economic growth.
Fifth, unlike the orthodox market for loanable funds argument where savings and investment are both a function of interest rates, Keynes suggests that savings and investment are determined separately from one another and, as a result, may not equilibrate at the full employment level of output.
Thus, by revisiting John Maynard Keynes’ seminal work, The General Theory of Employment, Interest, and Money, and drawing directly from Keynes, a completely different, heterodox, story will be revealed separate from the arguments presented within the orthodox tradition.
However, before turning to the heterodox perspective, let’s briefly review the orthodox positions.