Cambridge economics has died out

from Lars Syll

A couple of weeks ago yours truly had a review of Diane Coyle’s Cogs and Monsters in WEA Commentaires. As I wrote, there’s a lot in the book to like, but unfortunately also some things very hard to swallow. James Galbraith seems to argue along the same lines in his Project Syndicate review:

Cogs and Monsters: What Economics Is, and What It Should Be: Coyle, Diane:  9780691210599: Amazon.com: BooksCoyle subscribes to the grand illusion that price adjustment is the economy’s prime mover. But as the Cambridge Keynesian economist Nicholas Kaldor noted in his slim 1985 book, Economics without Equilibrium, “the intuitive belief that prices are the key to everything” is simply wrong. The foundation on which Coyle places modern mainstream economics is a myth …

When I attended the University of Cambridge in 1974-75, I read Keynes, met Piero Sraffa, listened to Joan Robinson, and studied with Kaldor, Luigi Pasinetti, Richard Goodwin, Ajit Singh, Wynne Godley, Robin Marris, and Adrian Wood. Back then, it was understood at Cambridge that markets do nothing like what Coyle claims they do. Just as Einstein had erased Euclid’s axiom of parallels, Keynes’s General Theory had long since obliterated the supply curves for labor and saving, thereby eliminating the supposed markets for labor and capital.

It followed that the prices of production were set by costs (mostly labor costs and interest rates), while quantities were determined by effective demand. Markets were not treated as if they were magical. It was obvious that most resources and components did not move under the influence of an invisible hand. Rather, they moved according to contracts between companies on terms set by negotiation, as had been the case for more than a hundred years …

But the Cambridge school of economics that understood these things has died out. It was targeted in the great intellectual purge of the Thatcher era, and it was pried from its footholds in North America by early-stage McCarthyism, Reaganism, the MIT self-proclaimed Keynesians, and the Chicago School. Only a few scattered survivors remain today …

Coyle concludes that “economics needs to change.” She is surely right about that. But it is impossible for economics to advance as long as it remains anchored to the mainstream bedrock on which Coyle’s own training was based …

Cambridge has forgotten Cambridge, and it is poorer for it.