- Prof G. Omkarnath (Associate Professor, Dept of Economics)
In the pre-war decades the academic spotlight was undoubtedly on Cambridge, England. Alfred Marshall, founder of the Cambridge School, held total sway over the teaching of economics (his term) in the Anglo-Saxon world. His Principles of Economics effectively recreated the demand-supply approach to economic theory, inaugurated by Walras, Jevons and Menger, in the class room. His devices of ‘partial equilibrium’ and ‘period analysis’ held out the promise of economics being an applied science. Marshall’s project however went beyond this. He sought to establish the continuity of demand-supply economics with the classical political economy of Adam Smith and Ricardo. Through analogy, rhetoric and generous use of qualificatory footnotes he presented the new approach as a progressive refinement of old theories. This rendered the new approach ‘neoclassical.‘
It is well-established that neoclassical theory is essentially a reaction to Classical and Marxian theories of profits rooted in the labour theory of value. Neoclassical theory had to posit a symmetric theory of distribution based on convex technology and relative scarcity of ‘factors’. Even so, neoclassical theory had to reckon with the special problems related to conceptualization of capital. That this posed insuperable problems for ensuring a stable demand function for ‘capital’ was the upshot of the debates in capital theory of the 1960’s led by Piero Sraffa and Joan Robinson. In the meantime Marshall’s theory ran into trouble twice over. In the late 1920’s Sraffa exposed Marshall’s inconsistency in trying to integrate increasing returns and competition within a partial equilibrium framework, in particular his idea of the ‘representative firm’. Then in the 1930’s Keynes’ General Theory destroyed the conclusion of full employment based on the supposed effective operation of what Marshall called the ‘Principle of Substitution.’ Nothing but ideology can explain the fact that neoclassical orthodoxy emerged unscathed from these attacks.
In the post-war period the spotlight on economics shifted from England to the United States. Paul Samuelson’s enormously influential textbook, Economics, allowed respectable space for Keynes. Neoclassical theory now assumed the avatar of ‘microeconomics’ and started having an uneasy coexistence with Keynes’ ‘macroeconomics.’ They make strange bedfellows, especially in the same textbook, because the former has full employment as its conclusion, whereas the latter begins with the enquiry about what determines the level of employment. American economists set out to mathematically deepen the Walrasian variant of neoclassical economics known as General Equilibrium theory. However, mathematical rigour did not stand up to economic logic. The project was hamstrung because general proofs of stability of equilibrium could not be established for the economy with production. A compromise had to be made on the concept of equilibrium itself. Adoption of concepts of ‘temporary equilibrium’ and ‘inter-temporal equilibrium’ threw away the long-established method of the long run positions. The theory was rendered completely and hopelessly static. After the 1970’s General Equilibrium theory has been quietly removed from the core curriculum of graduate economics, and microeconomics in its avatar of ‘mainstream’ economics received the pride of the place.
As the US and other major economies used the Keynesian demand management to usher in the Golden Age of capitalism in the 60’s and the 70’s, time was opportune to absorb Keynes back into orthodoxy. New variants of macroeconomics – monetarism, rational expectations, microfoundations, supply-side economics and so on – mushroomed in the US universities. As European universities found their best students and faculty migrating to the US, they came under pressure to ‘internationalise’ their curricula. American textbooks began to rule the roost everywhere. The post-war development economics which had significant influence on the programme of industrialization in India and elsewhere now stood discredited. It was to be replaced by a new microeconomics armed with game theory. The rise to prominence of the Pacific Rim countries, Reagonomics and Thatherism gave rise to a new credo of neoliberalism in economic policy as well as in development thinking, apart from teaching of economics. Sraffa’s revival of classical economics on a consistent foundation has meanwhile produced a million critical and constructive papers. This, together with the currently unfolding global economic crisis will hopefully lead to a rethink in economics education everywhere.