ABSTRACT
Introduction In the nineteenth century and between the two world wars, until 1945, economists were concerned with market imbalances, fluctuations and crises, and abundant literature has been published on economic cycles. The research studies did not, at the time, only focus on perfect competition, general equilibrium and constant-rate growth. In the interwar period, an emerging school of thought (later known as “heterodox economics”) analysed imperfect market functioning. Besides Keynes and Schumpeter’s works and their deep intuitions (Keynes, 1936; Schumpeter, 1939, 1942), let us recall that in 1933, Edward Chamberlin heeded Schumpeter’s criticism and explained that a monopolistic firm may well have lower costs than its “purely competitive” alter ego. Let us also bear in mind that Joan Robinson, also in 1933, published The Theory of Imperfect Competition, and laid the foundations, in the thirties, for a reflection on market imperfection. Regarding the modelled approach to crises in the early twentieth century, we also remember that, in 1942, Paul Sweezy focused on applying the Marxist analysis to monopolization, stagnation and financialization. We also know that advances in the mathematical modelling of economic dynamics were made at the end of WWII. Differential equation models for economic dynamics were developed (Allen, 1956 [1938]). And theories of systems also contributed to new advances and insights that should have been used for dynamic planning and therefore better distribution of resources. On the credit side, the notion of boosting growth through financial and credit impulse has been largely advanced by Keynes and Schumpeter, and particularly by Keynes’ General Theory of Employment, Interest and Money with the new model of a circuit irrigated by credits or by capital advances that will make deposits. Messori argued (Messori, 1997, 2004) that Schumpeter did not look at monetary problems from a traditional perspective but essentially approached those credit functions as a bet on the future, and an essential part of the cyclical evolution of the economic system. The very dark thirties in continental Europe and the end of the disastrous 1939-1945 war were followed by the “cold war” era. Unfortunately for economics, previous research programmes came to a standstill and some ideological
positions on economic organization hardened, with a polar opposition between the ideology of the market economy (pure or social (Franke and Gregosz, 2013)) prevailing in Western countries and the ideology of so-called “socialism” in the Eastern bloc. This iron curtain, of course, affected the actual organization of economies and led to different forms of economic organization in the different nations of Europe, for example Germany and France. It also affected economic research (with the emergence of a “mainstream theory” in Western countries). This also had an effect on the content of the best textbooks in the Western literature and on the political recommendations of a lot of mainstream economists. They usually focused their attention on pure exchange modelling, on issues of balance between supply and demand in the different types of markets, issues including the currency market, and the correct formalization of the interdependence between markets. In short, three schools of thought emerged in the sixties, the third school – “mainstream economics” – rapidly prevailing over the first two. The first school was composed of economists of socialism and of socialist economists (in France, for example, and in Eastern Europe). Socialist economists created models of socialist operational and calculable planning, and some considered that central planning was a feasible future (Georgescu-Roegen, 1960; Lange and Taylor, 1964; Lavigne, 1979). But they were very disappointed: “real socialism” in the countries of Eastern Europe was not functioning. The second school was that of political or institutional economics in a German, a French (Baslé, 1993) or an American tradition. The institutionalist schools lost ground in the sixties. Some economists seriously attempted to revive the relevance of the institutional approach in the period following new crises (oil shocks and financial crises). The necessity to take into account structural and institutional change and to justify further regulatory intervention prompted academics and institutional researchers to explore new avenues. But their attempts often remained confidential. A third school emerged in the West, on both sides of the Atlantic Ocean. It was led by supporters of the competitive equilibrium theory and of “balanced growth” models. This school was to become central and dominant in orthodox economic research. The downside or lateral effect of this dominance of mainstream economics was that the theories of fluctuations and crises were discarded. The development of growth models led economists to increasingly refer to an optimistic ideology of an unlimited technical progress: growth only will have positive consequences and will be generally associated with social development. The specificities of each country were not erased. The guidelines for economic policies selected by each State depended on its own trajectory and history. In some societies (e.g. Germany), the possibly “social” character of a market economy served as a guiding dogma and was seen as being able to resolve the issue of imbalances. The Soziale Marktwirtschaft (a reference to a “naturally” competitive and social economy) totally replaced the old and so-called heterodox institutionalist approaches of socio-economy of the early twentieth century
(German institutionalism, socio-economics of Max Weber, American institutionalism). Thus, the mainstream school that emerged in Germany became something of a new national German orthodoxy! In the sixties, the most widespread literature introduced the core principle of mainstream economics: the micro-economics/macro-economics dichotomy. The main focus was on market equilibrium and the necessary return to equilibrium after a transient disturbance, not on cycles or on fluctuations. The growing interdependence of nations since the nineties has certainly complicated this first analysis of national recessions and the detection of opportunities for national and international macro-economic regulation (Mazier, Baslé and Vidal, 1999). But, different types of solutions to this macro-economic regulation problem were developed by the various States, in attempts to find the best approaches to economic and social intervention. The policy mix advocated in mainstream publications, and particularly in American textbook presentations, was based on a federal budget intended to smooth fluctuations and on an accommodative central bank with several macro-economic objectives (Colander and Landreth, 1996). In the Western context, emphasis was placed on the standard paradigm of balance and this has narrowed the field of economic research. The limitations of the mainstream schools in the sixties raise two questions. First, why did partial equilibrium models and general equilibrium models become so attractive? Was it the observation of historical facts of equilibrium? Were the years of the post-war boom in Western countries years of market equilibrium? Did this period of growth present all the constants introduced in the models? Were the markets, at the time, truly more competitive markets? Was the “money market” a market like other markets? And second: was it so difficult to model macro-economic dynamics?1 Was it so difficult to deal with overall dynamics and to specify models for illustrating the dynamics of credit in particular? Was it the internationalization of finance and industry that prevented the development of an appropriate dynamic model for open economies today? To address these two questions, we propose to go back to the fifties and sixties and to discuss three points.
