Review: Some Economic Ideas to Think About in 2012

In 2009, the Institute released some careful research on the micro-level effects of the recovery act (one example is at this link). That work helps to answer questions about how the benefits of specific stimulus packages will be spread out among different individuals, and households, and demographic groups in the United States.

Increasingly, these and other distributional issues loom large in U.S. debates about economic policy. For example, some influential economists contend that a distribution of income that is increasingly slanted toward “the 1 percent” has been a contributing factor to the dangerous upward trend in U.S. household debt that began decades before the recent financial crisis.  The regressive tax policies called for by many candidates ahead of tomorrow’s big Iowa Republican presidential caucuses also bring to mind these serious problems (see this New York Times link for a description of the Republican candidates’ somewhat varied positions on fiscal issues).

An important school of thought that emphasized distributional issues in macroeconomics was the so-called “Cambridge school,” whose name connotes its association with Cambridge University in England and Cambridge progenitors such as John Maynard Keynes. This year, Piero Garegnani, who was closely linked in many ways with this school of thought, passed away (an interesting professional obituary is here). It was interesting to see this eminent Italian economist speak in a small, uncrowded room, at the big annual economists’ conference in Chicago, about five years ago. Decades earlier, Garegnani was a protagonist in the “capital controversy” between the Cambridge school and a number of well-known orthodox economists, most of them based in Cambridge, Massachusetts, here in the United States.

Geoffrey Harcourt was another important figure in this debate. During the Institute’s holiday break last week, I eagerly read The Structure of Post-Keynesian Economics: The Core Contributions of the Pioneers, Harcourt’s sympathetic 2006 account of the work of the Cambridge school and some of its closest post-Keynesian intellectual relatives. The book moves quickly in its 157+ pages through many of the main ideas developed by these post-Keynesian schools. The points are made with words, simple algebra, and diagrams. The book contains some interesting tidbits and observations that only an insider such as Harcourt could muster.

Among the themes of the book is the idea that people in the middle and working classes in most economies consume almost all of their disposable incomes, while the wealthy tend to save rather substantial portions of increases in their disposable income, including payments from the government. These issues have been discussed frequently since 2008 or so, as the governments of developed countries have once again turned to fiscal policy as a weapon against recession, but largely without the benefit of the useful theoretical ideas developed in the post-Keynesian literature. These ideas might help guide a more careful and rational discussion of countless policy questions that involve economic growth, the distribution of income and wealth, or both.

On the other hand, money and finance lie mostly in the background of Harcourt’s narrative, garnering only a 6-page chapter. This portion of the book touches only briefly on the debate with Milton Friedman and the other monetarists, and Minsky’s work is mentioned only in a short, albeit laudatory, footnote. It is a frustrating chapter, indeed, and the author explains almost apologetically that money and finance were not covered extensively in the lecture notes that formed the basis of his compact narrative.

The book maintains an analytical tone but deals with issues that often strike citizens and students of economic policy as merely political. In this respect, the book complements the approach of John Rawls and numerous other political philosophers, who have presented carefully worked-out arguments in favor of what they believe would be a fairer society, one that would boast among other things a more equal distribution of income and wealth.

The reader will find a wide range of views discussed, but the book shows us the Cambridge school’s perspective, which will certainly be unfamiliar to most U.S. readers. Harcourt notes that most of the “views and approaches taken in this volume still continue to be regarded by the bulk of the profession as those of dissenters.” These ideas constitute an endowment of economic theory that the book helps to preserve and make accessible to serious students of all fields, persuasions, and levels.