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development of macroeconomic models that describe not only the static state of the
economy, but the problems of economic dynamics.
Neo-Keynesians proposed a model of economic growth (Harrod, Domar) and
developed the starting points of the theory of economic dynamics. An analysis was
carried out of the impact of technological shifts and scientific and technological
progress on economic growth.
J. Hicks developed the theory of economic cycles, in which he put forward the
position of lower and upper barriers to equilibrium movement (the theory of "floor"
and "ceiling"): when full employment is achieved, income growth stops (encounters
the upper barrier — ceiling), investments are reduced; at the same time, investments
cannot fall to zero, since worn-out capital must be replaced, i.e. there is a limit to the
reduction of investment (floor), after which the decline in investment and income
slows down, and after some time they begin to grow again.
Neo-Keynesians explore the causes and depth of cyclical fluctuations and
substantiate the conclusion that rapid economic growth is just as undesirable as a long
recession.
E. Hansen, in addition to the multiplier principle, introduced the concept of
accelerator (income growth in some cases can increase investment: new demand for
additional consumer goods arising as a result of investment creates additional demand
for new means of production, and then for new investments).
Recipes for state regulation of the cycle, employment levels, and growth are
being developed.
2. Orthodox Keynesianism.
Orthodox Keynesians (Paul Samuelson, James Tobin, Robert Solow, etc.),
while remaining faithful to the basic postulates of Keynesianism, proceed from the
fact that without the foundation of macroeconomic theory and corresponding
economic policy laid by Keynes, further development and improvement of the system
they represent is impossible. Although they do not rule out its renewals, considering
the teachings of J. Keynes as one of the basic sources of the new system. This school
became popular in the 1960s. The result of such a modification was the emergence of
a "neoclassical synthesis", P. Samuelson was one of its authors, he formed the model
of a mixed economy.
The neoclassical synthesis was the next stage in the development of the
Keynesian doctrine, oriented towards changing conditions, and the evolution of
capitalism. It was formed as a combination of the main provisions of the Keynesian
doctrine with the traditional approach of neoclassicism and aimed at creating a model
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that would include certain features of Keynesianism, while also taking into account
the action of the market mechanism of self-regulation of the economic process.
3. Left Keynesianism.
It was formed in England, at the University of Cambridge. Its representatives
(Joan Robinson, Edward Chamberlin, Nicholas Kaldor, John Eatwell and others)
criticized the very doctrine of Keynes, the neoclassical and orthodox directions.
Left Keynesianism put forward its own version of the theory of economic
growth and its own version of state regulation of the economy.
Using the Keynesian category of effective demand, J. Robinson associated its
dynamics not simply with psychological factors of a random nature that determine
propensities for consumption and investment, but gave them a very definite social
meaning associated with the distribution of income and the dominance of
monopolies. This revealed the uniqueness of the social position of the left
Keynesians, expressed in the representation and protection of the interests of the nonmonopolized middle and petty bourgeoisie, farmers, intellectuals, employees and
workers.
One of the starting points of the concept of left Keynesians was the theory of
underconsumption. All negative manifestations in the economy (economic crises,
underutilization of production capacity, rising unemployment) are a consequence of
the low level of income of the main part of the population, on the one hand, and the
reluctance of the rich strata of society to increase their consumption, on the other.
The solution is to eliminate inequality in income distribution through
government regulation of the economy, liberation from the oppression of monopolies,
curbing inflation and ensuring full employment.
4. Post-Keynesianism.
It arose in the 1960s and 1970s. It has two branches. Representatives of both
branches reject the orthodox version and sharply criticize its supporters.
1) monetarist post-Keynesianism is formed in the USA (Axel Leijonhufvud,
Hyman Minsky, etc.). Monetarist post-Keynesians advocated the purification and
renewal of the Keynesian concept, seeking to supplement it with what they
considered to be missing elements. Representatives of post-Keynesianism believe
that Keynes's theory itself is able to lead the economy out of crisis if it is cleared of
alien layers. They call for eliminating simplified approaches to the economic process
and adding consideration in theoretical postulates and in the field of economic policy
of the factor of uncertainty in the deployment of economic processes.
2) the second branch emerged on the basis of left Keynesianism in England
(Piero Sraffa, Luigi Pasinetti, Piero Garegnani, etc.), inheriting its main postulates.
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This branch of Post-Keynesianism is also called Neo-Rycardian Keynesianism, since,
along with the theory of J. Keynes, it uses the theory of D. Ricardo.
The problem of economic growth occupied a central place in the works of postKeynesians. Their concept of economic growth serves as the basis for the formation
of income policy; it acts as a means of regulating the reproduction process. In their
theories of economic dynamics, English Post-Keynesians made the growth rate
dependent on the distribution of national income. Their doctrine also devotes a large
place to social problems.
5. French version of Keynesianism.
The concept of J. Keynes influenced the formation of a new doctrine of state
regulation of the economy in France. The system of programming and indicative
planning of the economy (François Perroux), which provides for the adoption of
national plans based on the coordination and compromises of various social groups,
has received practical implementation.
Proximity to Keynesianism was manifested in the active role of the state and its
regulatory impact on the economy, in the growth of the public sector, direct
entrepreneurial activity of the state, in its impact on structural changes, on stimulating
the process of capital accumulation, etc.
6. Neo-Keynesianism.
Originated in the 1980s, it is represented by the older generation economists
(Arthur Okun, James Tobin), some representatives of monetarist Post-Keynesianism
(H. Minsky, P. Davidson), etc.
In the new movement, the basic parameters of Keynesianism are preserved. Its
supporters proceed from the fact that there are reasons that influence deviations from
stable growth and full use of resources, and therefore regulatory intervention by the
state is necessary, and Keynesianism as the basis for such regulation retains its
significance as a theory of disequilibrium. However, in the analysis of the causes of
instability in the new Keynesianism, other aspects appeared that went beyond the
usual macroeconomic theory (the increased impact of the internationalization of the
economy, the state of money circulation and the foreign exchange market, inflation).
Neo-Keynesians do not limit themselves to developing problems at the
macroeconomic level. They are going to expand their research, extending it to the
microeconomic level, covering the analysis of the behavior of economic agents in
production and in the corresponding markets.
Neo-Keynesianism synthesizes in some way the two main directions of
economic theory — Keynesianism and neoclassicism. However, their convergence of
the two concepts turns out to be deeper than the neoclassical synthesis.
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TOPIC 11. NEOLIBERALISM
11.1. Neoliberalism: general characteristics
Almost simultaneously with Keynesianism, another direction of economic
thought arose — neoliberalism.
The basis of this direction is the principle of "laissez-faire", which means the
right of people to do whatever they want in life, complete freedom of the market.
However, neoliberals believed that unlimited market freedom is not created on its
own, but through some state intervention in market processes.
Some neoliberals saw the state in the role of a "night watchman": protecting
private property and the basic rules of market behavior. Others — the role of a
"sports referee" who sets the rules, enforces them, and punishes violators of
these rules.
However, neoliberals considered direct government intervention in the
economy unacceptable.
There are different names for neoliberalism: in Germany it is called
ordoliberalism, in Austria and Switzerland — neomarginalism, in the USA — simply
neoliberalism.
There are several schools of thought in neoliberalism. In Germany — the
Freiburg school (Walter Eucken, Ludwig Erhard). In England — the London School
(Friedrich Hayek). The Chicago school of monetarists, led by Milton Friedman, is to
some extent related to neoliberalism.
11.2. Economic views of L. Mises and F. Hayek
The revival of the liberal movement is credited to the Austrian economist
Ludwig Mises and his follower Friedrich Hayek.
Ludwig Mises (1881–1973) — Austrian economist, representative of
neoliberalism.
Institutionalism has had a lot of attention on Mises's work. Mises connected the
motives of work activity with psychology, instincts, and morality.
Mises analyzed modern economic systems and identified 3 types among them:
a pure market economy, a corrupt market and a non-market economy.
The main driving force and motive of activity is private property, which
contributes to the rational use of resources in the economy. Mises was very critical of
socialism and its planning (book "Socialism" — 1936), because he believed that
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under socialism there is no competition, without which there are no incentives for the
best use of resources.
An even more ardent opponent of socialism was Mises's student and
compatriot Friedrich August von Hayek (1899–1992).
Works: "The Road to Serfdom", "The Fatal Conceit", "The Denationalization
of Money", etc.
Hayek promoted the free market order, the purity of the market, criticized the
state's budget redistribution policy, trade unions, and Keynesianism.
The state should not be involved in education, social insurance, rent, or money
issue. The state can only be allowed to pay pensions and unemployment benefits.
Social inequality is a justified and natural phenomenon: as a result of
competition, a natural selection of the worthiest people who deserve wealth occurs.
The market should be uncontrollable, everything happens spontaneously.
Spontaneous order penetrates through the market into all spheres of society.
Hayek was a supporter of microeconomics, considering macroeconomics a step
towards planning, towards regulation, which is already unfreedom.
In 1974, Hayek received the Nobel Prize for his work in the field of monetary
theory, market fluctuations and analysis of the interdependence of economic, social
and institutional processes.
11.3. Freiburg School of Neoliberalism. Social market economy concept
The Freiburg school is considered the center of neoliberalism, developing a
theory that became official policy in West Germany.
The founder of the Freiburg school is Walter Eucken (1891–1950).
Works: "The Foundations of Political Economy" (1940), "Principles of
Economic Policy" (1950).
Eucken was not a supporter of either capitalism or socialism. He divided all
economic systems into two types: market economy (regulated by production
participants) and centrally managed economy (regulated "from above"). He
considered these forms of management "pure", not existing in reality.
Eucken proposed a model according to which economic activity should be
built. This model is based on economic order. Although Eucken advocated the market
and competition, he believed that good economic order does not form on its own.
Establishing the order in which the market operates is the task of the state.
Elements of economic order are free competition, the creation of a viable price
system, openness of markets, ensurance of the stability of money, guarantee of
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private property, freedom of contracts, the principle of responsibility of market
entities, constancy and consistency of economic policy.
All these principles must be applied comprehensively and be included in the
economic policy of the state.
Eucken opposed monopolies, to which he included trade unions. The state must
prevent imbalances in the economy and fight crises.
Instruments of government regulation should only be economic: taxes, loans,
government orders, export promotion.
Representatives of the Freiburg school of neoliberalism were also:
Alfred Müller-Armack — proposed the term "social market economy" in
1947, which is still used to designate a special economic system;
Wilhelm Röpke and Ludwig Erhard — developed a model of "social market
economy" for Germany, the main features of which are:
1) the special role of the state in establishing economic order. The market must
be free and competitive. But the conditions for competition are created by the state.
The state sets the rules of behavior in the market. The state should not be involved in
economic and production activities;
2) special social policy of the state: ensuring employment, eliminating regional
differences in income, increasing the well-being of the population, improving the
forms of workers’ participation in the management of enterprises;
3) development of competition, fight against monopolism, promotion of small
and medium-sized businesses, creating conditions for everyone to demonstrate their
abilities.
Germany's social market policy has yielded positive results in economic
development. It continues to this day.
11.4. Monetarism
In the 1970s such process as stagflation began to develop — a simultaneous
increase in unemployment and the price level. Keynes's theory, which was dominant
at that time, could not explain this.
A new direction of economic thought, based on neoclassical theory,
emerged — monetarism. Monetarism (from the English money) is the science of
money and its role in the reproduction process. This theory is about regulating the
economy using monetary instruments.
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In its ideas, this theory was based on the quantity theory of money. However, it
differs from the traditional quantity theory of money, which existed back in the days
of mercantilism.
The quantity theory of money says: there is a direct relationship between the
quantity of money and the price level, prices are determined by the amount of money
in circulation, and the purchasing power of money is determined by the price level.
One of the developers of the quantity theory of money was the American
economist Irving Fisher (1867–1947). In his work "The Purchasing Power of
Money" (1911), he derived the famous equation:
MV = PQ,
where M is the quantity of money, V is the speed of its circulation, P is the price
level, Q is the quantity of goods.
This equation consists of two parts: the right side of PQ is the commodity side;
it shows the volume of goods sold on the market in price terms and represents the
demand for money. The left side of MV is monetary, showing the amount of money
paid when purchasing goods in various transactions, which reflects the supply of
money. Thus, this equation shows the equilibrium in the commodity and
money markets.
This formula shows that the price level is directly proportional to the quantity
of money and the speed of its circulation and inversely proportional to the volume
of trade.
Of course, Fisher's formula somewhat simplifies reality: prices are also
influenced by other factors — income level, expectations, employment, technological
changes.
The practical application of the idea of monetarism was found in the economic
program of US President Ronald Reagan in 1980–1988. This program, called
"Reaganomics", included measures such as reducing social benefits for workers and
the unemployed, increasing taxes on the income of employees, and reducing taxes on
the income of entrepreneurs, especially large ones. This led to a sharp increase in the
number of poor people, but at the same time contributed to a decrease in inflation, an
increase in supply on the market, and stabilization of economic growth rates.
Monetarism also found application in the policies of Margaret Thatcher, and
in the economic practice of many regions of the world.
In the development of the theory of monetarism, two stages can be
distinguished: old and new monetarism.
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Old monetarism
Swedish school. Representatives: Erik Lindahl (1891–1960), Gunnar Myrdal
(1898–1987), Bertil Ohlin (1899–1979).
It took shape at the turn of 1920–1930. Its foundations were laid by Knut
Wicksell (1851–1926).
Works: "Value, Capital, and Rent" (1893), "The Influence of the Rate of
Interest on Prices" (1896).
Over a long period, Wicksell studied the causes of price changes. He came to
the conclusion that changes in the quantity of money in circulation and changes in the
quantity of prices are influenced by the rate of interest, i.e. changes in loan interest
are directly related to the problem of monetary balance.
Wicksell argued that any change in prices is always preceded by a change in
the conditions determining the scale and nature of investment.
Wicksell introduced the concept of "expectations" of economic entities. He
also created the theory of the business cycle.
The main feature of the Swedish school is its belief in the effectiveness of
monetary policy, which influences the expectations of economic entities.
Representatives of the Swedish school tried to combine theoretical analysis
with practical activity in pursuing economic policy.
New monetarism
The new monetarism is represented by the Chicago School, led by the
American economist Milton Friedman. Representatives of this school are also Henry
Simons, Frank Knight, Jacob Wiener.
Milton Friedman (1912–2006) — American economist, head of the
monetarist Chicago school of economics, winner of the Nobel Prize in Economics in
1973 for his achievements in the field of consumption analysis, the history of
monetary circulation, development of the theory of money, as well as for evidence of
the complexity of stabilization policy.
Born into a poor family of immigrants from Eastern Europe, he studied at
Rutberg University, graduating with a degree in economics and mathematics, and
received a master's degree from the University of Chicago.
During World War II he worked in the US Treasury, was engaged in taxes,
military-economic research. In the post-war period, he acted as a consultant during
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the implementation of the Marshall Plan. In 1948 he returned to the University of
Chicago. He studied problems of prices, money circulation, and consumption theory.
Works: "A Program for Monetary Stability" (1969), "Inflation: Causes and
Consequences" (1963), "Money and Economic Growth" (1973), etc.
The main postulates of Friedman's monetary policy:
1. Recognition of the stability of the monetary economy.
He substantiated the advantages of free, unlimited competition, in which the
market system has the ability to automatically self-regulate and achieve equilibrium.
Difficulties and crises arising in the economy are imposed from outside, and
the main culprit is government intervention.
2. Priority of monetary factors.
Among various instruments for regulating the economy, preference should be
given to monetary methods. Money influences prices, consumer demand, cost levels,
volume and structure of production.
3. Regulation should focus not on current tasks, but on long-term ones, since
the consequences of fluctuations in the money supply do not affect economic
parameters immediately, but with some gap in time.
Monetary policy should be aimed at achieving correspondence between the
demand for money and its supply.
Friedman argued that the demand for money is relatively stable. The demand
for money has an inverse relationship with the interest rate: as the interest rate rises,
the demand for money will fall. The demand for money also depends on the
profitability of other types of wealth (securities, real estate, etc.).
The supply of money is quite variable; it is regulated by the central bank, the
size of loans, and the purchase and sale of securities.
Studying the monetary history of the United States, Friedman came to the
conclusion that for almost a hundred years, the economic dynamics of the United
States were determined by the movement of the money supply (the amount of money
in circulation). It was noted that a change in the growth rate of the money supply
preceded a change in the growth rate of the social product. The peak of growth of the
money supply preceded the rise in production, the lowest point of the money supply
preceded its decline. (An increase in the amount of money in circulation leads to its
reduction in price, the interest rate decreases, it becomes profitable to take out loans,
production and employment expand.) At the same time, the lag of the consequences of
monetary policy ranges from 12 to 16 months. In other words, it is quite difficult to
make an accurate forecast of exactly how monetary policy measures will affect the
economy over such a long period. Therefore, he proposes to abandon a flexible
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monetary policy and introduce a rule of constant increase in the money supply in small
and equal portions (week after week, month after month) within the range of 3–5 % per
year ("Friedman’s monetary rule"). When establishing such increments, one must
focus on two factors: the level of expected inflation and the growth rate of the social
product.
In the practice of monetary regulation, they usually establish not a fixed
standard, but a so-called fork around which the money supply should fluctuate, or a
"target" — an upper level that should not be exceeded.
So, Friedman considers the stability of the movement of the money supply as
one of the most important conditions for the stability of the economy as a whole. And
the main problem of economic disequilibrium — inflation — must be solved by
reducing the amount of money in circulation.
TOPIC 12. SOCIAL AND INSTITUTIONAL DIRECTION
OF ECONOMIC THOUGHT
12.1. General characteristics of institutionalism
Institutionalism appeared at the end of the 19th and beginning of the 20th
centuries. The term "institutionalism" originated in the USA and referred primarily to
a certain direction of American bourgeois political economy. However, in other states
at the same time, similar trends in socio-economic thought appeared.
The US economy of that time was characterized by the following features:
- huge monopolies appeared;
- a new layer in the social structure of society has emerged engineers, teachers,
scientists, office workers, and members of the liberal professions;
- the problem of democratization of the economic and political system of
society arose.
Due to the aggravation of the contradictions of capitalism and the
disappointment of some economists in the results to which the free market
mechanism leads, opposition to the teachings of the classics and neoclassics arose.
Ideas appeared about the possibility of overcoming the evils of capitalism through
reforms, ideas about the need for government influence on the "defects" of the
market: monopoly, sharp social inequality, economic crises, divergence of private
and public interests.
At the turn of the 19th–20th centuries. American political economy in terms of
its level of development lagged far behind the European one. Therefore, the ideas of
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