The Levy Institute and the Future of Economics

According to my vita, my first paper for the Levy Economics Institute, “Unemployment, Inflation, and the Job Structure,” was first published almost exactly thirty years ago, in May 1995.[1]  It was a categorical dissent from the micro-market framework, dominant then and still, of mainstream economics. The abstract reads:

In this working paper, James K. Galbraith rejects the analytical construct within which many economists currently operate – that is, the construct in which, in the extreme, macroeconomic behavior is identical to the behavior reflected in microeconomic demand and supply curves.  He rejects it on the theoretical and practical grounds microeconomic categories (supply, demand, prices, quantities) “have little bearing on important policy questions.” The markets that have a bearing on policy either are asset markets (for which the rules are dramatically different from those for flow markets) or are not really markets at all, but rather a set of deeply structural social relations.

I mention this not to exaggerate my role but to illustrate how the Levy Institute has nurtured, over four decades since its founding in 1986, critical alternatives to the entrenched 18^th century worldview of academic economics. Over the years, Levy has offered a home to major intellects otherwise shunned – Hyman Minsky, Wynne Godley, Jan Kregel. It has fostered entire movements that would otherwise have had little institutional foothold – the Post Keynesians and Modern Monetary Theory among them.  And the Levy Institute has followed this path while maintaining high-level contact with the real worlds of finance, business, labor and government, and even welcoming the occasional mainstream academic who may secretly yearn to breathe free.

Even mainstream observers, such as The New York Times, now concede that a crisis in economics – periodically declared, as far back as 1971 by Joan Robinson – is truly upon us. The economists who dictated doctrine and dominated policy for the fifty years of neoliberalism have been repudiated by public opinion. They are out of government. To quote Gramsci: “The old world is dying and the new one struggles to be born.  Now is the time of monsters.”

In the higher reaches of the academy there is incomprehension, bewilderment and dismay – yet no sign of a thaw, let alone the “glasnost” and “perestroika” that the discipline needs.   The insiders do not acknowledge dissidents by name, never cite them, still less incorporate their ideas into lectures or textbooks. A “liberal” wing of the mainstream fosters a simulacrum of debate, while acting as a Praetorian Guard against the disapproved voices of the deeper critiques. Appointments remain controlled by a network of insiders who dominate departments and journals.  University administrators have not dared break up this cartel, nor establish free and independent intellectual centers.

Meanwhile, within the mainstream, it seems that discussions of the foundations of economic theory have withered away.  Fifty years ago, high neoclassical theorists – Paul Samuelson, Robert Solow, Kenneth Arrow and Gerard Debreu, Milton Friedman, Robert Lucas – ruled the roost. They have no current counterparts; at the fundamental level, it appears that “progress” in mainstream economic theory stopped.  Today’s mainstream appears largely preoccupied with empirical questions whose theoretical framing – that of a “labor market” for instance – is merely assumed.

For a time, it is true, behaviorists and investigators into complexity and chaos dug into the foundations of the neoclassical view and found them rotten. But as their approaches remained always in dialog with that view, they could never quite step outside and kick the foundations to pieces. The momentum behind these movements has faded.

In this lethargic, pre-revolutionary intellectual climate, the Levy Institute is well-prepared to spread the seed corn of the coming upheaval. Hyman Minsky’s insights into financial instability, Wynne Godley’s work on sectoral balances, projects on inequality, employment, and of course modern money are among the seeds, whose hybrid vigor gives the program of the Institute its strength.

The Levy Institute is Minskyan, Godleyan – and Keynesian in the sense that Minsky, Godley and Kregel have understood.  But these words are too narrow to describe the economics now in progress there. Moreover, “pluralist” is too vague and “heterodox” is not quite right, since it defines itself in opposition to the orthodox mainstream.  The work of the Levy Institute defines itself not as critique, but as an independent, multi-faceted, internally coherent discipline.

In our new book, Entropy Economics: The Living Basis of Value and Production, Jing Chen and I set out a common foundation, in several key respects, for much of the work already advanced at Levy.  Our purpose is to detach economics from the 18^th century mindset of equilibrium, rationality, and natural law, and to embed it into the scientific discourse of the past two centuries, in line with physics, biology, and (almost) every other social science. Here is a brief description of the basics:

• Economic value is a function of two things: scarcity in relation to market size and monopoly power. As market saturation increases and new suppliers enter, valuations fall. There is no such thing as a long-term equilibrium in price or quantities.
• All economic activity, like all living and mechanical systems, must tap into low-entropy resources and be able to do so with a usable surplus. Though neglected in neoclassical production theory, resources are key to economic analysis.
• To extract or use resources, for any purpose, from photosynthesis to nuclear fission, requires prior fixed investment, whose profitability over the life cycle is uncertain. Larger fixed investments are more efficient, but their returns are more volatile when conditions change.
• All investment is made according to plans, encoded in genes, blueprints, recipes, and in societies in habits, regulations, laws, and constitutions. Plans change over time; they evolve and differentiate, which is why there is no universal best policy in economics.
• All work requires inequalities – of temperature, pressure, incomes, and wealth. But excessive inequality is dangerous, for it threatens the stability of the system. Therefore, all economic activities, like all biological and mechanical systems, must be regulated to sustain their successful operation through time.
• Regulations control inequalities. Not all regulations are successful (God knows!) but general deregulation is a formula for explosive growth followed by collapse. The financial system in the 1920s and 2000s was not hit by “shocks”; it melted down from within.
• Governments and markets are not separable; governments do not exist to correct “market failure”; markets exist because governments provide a framework within which they can function. There are no markets, and certainly no stable markets, without governments to keep them under control.
• Finally, nothing is forever. Growth peaks, life ends, civilizations rise and fall. There is no equilibrium at the system or macroeconomic level.

These principles are consistent with the second law of thermodynamics, which is the most universal law of nature. They focus on resources as the starting point as argued by Nicolas Georgescu-Roegen, long before him by William Stanley Jevons, and more recently by the biophysical school. They are compatible with Keynes on probability, on money and monetary production, on the marginal efficiency of capital, and on the role of government in the management of the economy, as also articulated by Godley, by Abba Lerner, Robert Eisner, and other independent Keynesians. They are in synch with Minsky and with MMT, for money and credit are the accounting record of how real resources are assigned to production. They are aligned with the theories of technology set out by Joseph Schumpeter, Thorstein Veblen, and Clarence Ayres. and of how organizations control production, as articulated by John Kenneth Galbraith, Robin Marris, and Alfred Eichner.

In short, these principles fit with the work of major economists in the last century, except for those who built up the mainstream view of supply and demand, rationality and rational expectations, perfect competition and general equilibrium. Those principles are stated in disregard of the entropy law and have been obsolete for at least a century and a half.[2] They should, at long last, be discarded.  There is no reason why economics should be exempt from the entropy law.

And in the larger scheme of the world, the teleology of the “end of history” – so comforting to neoliberals intoxicated by the fall of the Berlin Wall and the collapse of the USSR, in the heady days when I first started writing for the Levy Institute – is an illusion rooted in an antique sensibility, with origins in ancient imperial China, pre-revolutionary France, and the peak self-confidence of the British Empire. It is no surprise that it became dominant in 1950s America, nor that it globalized in the 1990s.

But all around us, the foundations tremble, and it is past time to move on.

***

James K. Galbraith is a Senior Scholar and member of the Board of the Levy Economics Institute. He teaches at The University of Texas at Austin, where he holds the Lloyd M. Bentsen, Jr Chair in Government/Business Relations at the LBJ School of Public Affairs, and a professorship in the Department of Government. Entropy Economics is published by the University of Chicago Press.

[1]The paper was revised in January 1996, the publication date on the Levy website.

[2]Piero Sraffa already in the 1920s called for Marshall’s theory of markets to be discarded. As did Keynes in the 1930s, John Kenneth Galbraith in the 1950s, and Joan Robinson in 1971. Our position is neither new nor eccentric.