This is a sequence of posts on “New Directions in Macroeconomics“, which discusses the numerous directions of research which must be incorporated to create a viable Macroeconomics for the 21st Century. We have previously discussed “Post-Keynesian Economics“, and “Modern Monetary Theory“. This post discusses the necessity of re-incorporating politics into economics.
Once we recognize the importance of history and institutions, it becomes clear that economic problems cannot be separated from politics and society. The interplay of class interests, and their relative power, is of essential importance in understanding political and economic structures of society. Current commitment to methodological individualism has blinded economists to these aspects, and left them unable to explain burning issues like the rapid rise of income inequality in the wake of financial de-regulation. There are many different perspectives from which the inter-relationships between politics and economics can be analyzed.
Marxist Perspective: Although the Marxian prediction of the demise of Capitalism has proven wrong, the methodology and tools he developed yield deep insights not available within the orthodoxy. Moore (2015) shows that dynamics of capitalism require ever increasing exploitation of all available resources. However, with the imminent exhaustion of planetary resources on a global scale, capitalism, appears to have reached its final frontier. A key Marxian insight is that exploitation is enabled by an ideology which creates an appearance of fairness, necessity, desirability, and attractiveness of the capitalist economic system. For an illustration of how modern economic theory fulfills this role, see ET1%:Blindfolds Created by Economics. Unlike orthodox macroeconomics, Marxist theory is well suited to understanding the global nature of capitalism; for key references, see Burnham (2001). Marxist analysis is also very helpful in understanding increasing inequality and exploitation, which is responsible for the inherent instability, and repeated crises, of the capitalist economy. Harvey (2017) is a useful introduction to contemporary understanding of Marxist theory, together with a critique of orthodoxy (see Video Lecture: https://www.youtube.com/watch?v=gBazR59SZXk ).
The Great Transformation: Polanyi’s famous book (see Summary of the Great Transformation) provides a deep analysis of the transformation in England from a traditional society to a market society. As he shows, emergence of the market mechanism created conforming changes in politics, society, and our attitudes towards the planet and people. Polanyi shows how social transformations work through collective efforts of classes, which are embodied in the form of institutions. However, he does not take classes and institutions as exogenously given. Rather, he shows how social transformation can create or destroy classes, and also institutions, in accordance with shifting balance of powers created by a complex of forces which act from within or without. Three major methodological principles used by Polanyi for the study of social change are articulated in The Methodology of Polanyi’s Great Transformation. All three run counter to received wisdom in contemporary economic methodology, and therefore furnish new foundations for an alternative 21st Century approach to economics.
The New Political Economy: Many have come to realize the impossibility of understanding economic crises of the past century without taking into account the political and historical context, as well as a deep analysis of the institutional structures. See for example “There is no economics without politics” by Admati (2019). This has led to the emergence of a new eclectic approach to the study of close connections between politics and the economy. The recently established Department of Political Economy at Kings College London provides as raison d’etre: “In a world characterized by financial uncertainty, ecological insecurity and value conflict, the links between political and economic processes are ever more apparent and the need for a multifaceted appreciation of how they operate, has never been greater.” As an illustrative example, Lemann (2019) provides an account of how economic theories, combined with political power, reshaped institutions and policies to dramatically change the social, political, and economic landscape over the past century. Combining political, institutional, and historical methods leads to deep insights into the workings of our economic system not available within the orthodoxy. A comprehensive and thorough book-length treatment is provided in a draft textbook on Political Economy by Daron Acmeoglu (2020).