The modern emphasis on macro-economics, the validity of which depends—as few writers in the field seem to realize—upon its reconciliation with micro-economics, aggravates the situation. For macro-economics, which is particularly amenable to mathematical enunciation, is now being taught at an early stage in the typical curriculum; and the young student tends, I fear, to spend more time grappling with mathematics than with economics, the difficulties of which are not mathematical. His attention is diverted from rigorous thought about the phenomena of scarcity and price, and the stabilizing and co-ordinative role of the price system, to the study of complex truisms.
When he graduates, he may have learned very little of basic economic science. If he tries to resolve in his mind the apparent conceptual confusions which most macro-economists elaborate, 1 he is likely to prejudice his academic record. Students with a lively and critical intelligence have admitted to me that they have felt it expedient in the struggle for good symbols to echo current texts and teachings mechanically, inhibiting all concern with their validity.
Despite my conviction that an economic creed has become entrenched within most of the universities, a Keynesian priesthood determined to retain its hold, I have no doubt that the majority of economists in all the universities are sincerely convinced that the greatest possible opportunity for the free expression of divergent ideas by those whom they regard as competent critics has been preserved.
But critiques of Keynesian concepts which have appeared during the last decade do render purposeless an enormous collection of apparatus, constructed through the expenditure of formidable, scholarly effort since This alone must have created powerful Edition: current; Page: [ 36 ] motives for resistance to the expression of competing teachings which threaten to precipitate widespread obsolescence in academic capital.
But the genuineness of the ever-present resistance to heresy does not weaken the force of my charge. And are not the dangers to academic freedom to which I have referred magnified when university economists are hoping for influence as advisers of governments? Even if we assume that there is no question of bias due to pecuniary interest, a more elusive problem remains.
Governments tend notoriously to disregard economists whose advice they believe it would be politically inexpedient to follow; and in the endeavour to exercise at least some guidance on the course of events, economists may all too easily be led to a compromise which ultimately weakens the force of disinterested and expert teachings. A barrier to the communication of ideas needs to be broken.
This might happen through initiatives from among the economists themselves; through deliberate action on the part of the governing bodies of universities anxious to avoid the slur of indoctrination; or through growing pressure from independent-minded graduate or undergraduate sceptics who recognize and Edition: current; Page: [ 37 ] resent an indoctrination which has remained too long without potent challenge. In the thickening gloom of our age, an age of declining standards, rampant inflation, and egalitarian ideology, it is perhaps too much to hope that the realm of economic thought alone will remain unscathed and at least this province of the human mind escape invasion by our contemporary follies.
In fact, what we find to-day is very much what one might have expected. We see a few thinkers engaged in a valiant but desperate struggle to defend and strengthen the great tradition they have inherited. The large majority of economists have to-day adopted an arid formalism as their style of thought, an approach which requires them to treat the manifestations of the human mind in household and market as purely formal entities, on par with material resources. Not surprisingly, the adherents of this style of thought have come to find the mathematical language a congenial medium in which to give expression to their thoughts.
This label is, however, rather misleading. The classical economists, in their great day, were concerned with human action of a certain type, the forms it takes in varying circumstances and the results it is likely to produce. They took the market economy of their time as object of their thought and asked why it was what it was.
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Gradually they built up a formal apparatus of thought in order to deal with these problems. But in doing so they have taken the shadow of the formal apparatus for the substance of the real subject matter. It will not surprise us to learn that when confronted with real problems, such as the permanent inflation of our time, neoclassical economics has nothing to say.
Economics is by no means exclusively concerned with what happens, but also with what might have happened, with the alternatives of choice which presented themselves to the minds of the decision-makers. In fact, it is in terms of these alternatives alone that the decisions can be rendered intelligible, which is after all the main purpose of a social science. Statistics, as Mises has often explained, merely record what happened over a certain period of time.
They cannot tell us what might have happened had circumstances been different. Thirty years ago Mises warned us of the futility of late classical formalism. Characteristically he thrust his blade into his opponents' weakest spot. He showed the inadequacy of the main tool of the formalists, the notion of equilibrium. The mathematical economists disregard the whole theoretical elucidation of the market process and evasively amuse themselves with an auxiliary notion employed in its context and devoid of any sense when used outside of this context.
In voicing these strictures Mises gave pointed expression to that opposition to the work of the school of Lausanne in general, and its fundamental concept, the notion of equilibrium, in particular, which has for long been a characteristic feature of the whole Austrian School. From Menger's letters to Walras to the work of Hans Mayer and Leo Illy a succession of Austrian writers have expressed their distrust of the Lausanne approach and criticised the theory of general equilibrium.
Mises, by contrast, established his claim to this title by his rejection of the equilibrium concept and thus showed himself to stand firmly in the true line of the Austrian succession. But he did not confine himself to criticism of the work of the School of Lausanne. He took an important step forward. He replaced the notion of equilibrium by the concept of the Market Process.
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We shall have more to say later on about this fundamental concept and its significance within the structure of Mises' thought. But there is another matter to which we must turn first. In the 30 years which have now elapsed since Mises made his attack on the late classical formalism of our age and its notion of equilibrium a certain re-orientation of modern economic thought has taken place.
We shall therefore have to ask ourselves whether, and how far, this metamorphosis of the notion of equilibrium has affected the validity of Mises' criticism of 30 years ago. In this essay we set ourselves two tasks: in the first place, to examine the question whether the new notion of equilibrium growth Edition: current; Page: [ 41 ] may be regarded as exempt from the criticism of the old variety of static equilibrium which Mises has presented.
In the second place, Mises' hints about the Market Process as an alternative to equilibrium as a fundamental concept will have to be worked out more fully. We shall have to ask what are the conditions of the continuous existence of such a process. We shall also have to ask, what is, within the framework of the market process as a whole, the status of those equilibrating forces which tend to produce at least partial adjustments. Though the new variety acquired fame and came into fashion as a feature of the Harrod-Domar model of economic growth, its origin has to be sought in Cassel's work in the second decade of this century.
He realised that economic processes in an industrial society subject to continous change could not possibly be analysed with the help of such instruments of thought. But he remained enough of a Walrasian to want to retain the notion of general equilibrium and the static method. Thus our economic system can remain in a state of general equilibrium all the time while output, population and the stock of capital grow steadily.
We now have equilibrium persisting in a world of steady change. The static method remains applicable to a world which is not stationary. Harrod and Domar, when they worked out their model, appear to have been quite unaware of Cassel's contribution. It is noteworthy that the protagonists of modern growth theories appear to believe that their models bear at least some resemblance to reality. There are shortrun fluctuations, of course, and even changes from one quarter-century to another. But at least there is no clear systematic tendency for the rate of increase of productivity in this sense to accelerate or to slow down.
If, in addition, labour input When Cassel presented his model, at a time when macro-economics had not been thought of, he had to stress the need for a uniform rate of progress in all sectors. In our age this implication is conveniently forgotten together with the Cassellian original. If the equilibrium of a stationary economy is an unsatisfactory tool of analysis for an industrial economy, growth equilibrium of the kind we described above is readily seen to be even less satisfactory.
When real incomes per head increase, income recipients do not spend them in the same proportion as before. The pattern of relative demand will certainly change. We also have to assume that costs are constant over the relevant ranges of output in all industries affected and that wage rates do not change, otherwise relative prices will change. Such assumptions about constant costs and wages when relative output changes must be regarded as being already somewhat unrealistic.
But the degree of lack of realism inherent in such assumptions pales into insignificance when compared with that of perfect foresight on the part of the producers without which we can have no instantaneous adjustments of supply to demand. In fact it is this assumption of perfect foresight that deprives the model of growth equilibrium of any resemblance to the market processes of the real world.
Yet, without such foresight the adjustment of supply to changes in demand will certainly be delayed, and during the delay there will be disequilibrium in the markets affected. If any transactions take place during the period of disequilibrium and, in a continuous market, how could this fail to happen?
To our knowledge, however, none of Edition: current; Page: [ 44 ] the many economists who have presented to us equilibrium growth models in recent years has attached the condition of re-contract for transactions during periods of disequilibrium. They have all, of course, assumed continuous and uninterrupted existence of equilibrium.
It is this which, without instantaneous adjustments of supply to changes in demand, is impossible. Similar problems arise in connection with the composition of the stock of capital.
The maintenance of a constant capital—output ratio whatever this vague notion may mean and imply is, of course, not a sufficient condition of the maintenance of general equilibrium in a growing economic system. The actual composition of the capital stock in terms of the various capital resources must be appropriate to the composition of total output demanded. The capital stock must contain no single item which its owner would not wish to replace by a replica, if he suddenly lost it by accident, otherwise the stock cannot be in equilibrium. Such changes in demand for consumer goods as we discussed above must therefore be at once accompanied by a corresponding change in the composition of the capital stock, otherwise this stock cannot retain its equilibrium composition and we confront a new source of disequilibrium.
Of course, so long as we regard all capital as homogeneous the problem does not arise. As soon as we face the fact that most durable capital goods, even if not actually specific to the uses for which they were originally designed, have at least a limited range of versatility, the continuous maintenance of the equilibrium composition of the capital stock in a world in which relative demand and technology are bound to change in quite unpredictable fashion, emerges as a serious problem.
It is instructive to look at the whole problem from the point of view of the convergence of expectations. A society in which economic progress occurs is part of an uncertain world. Nobody knows the future.
In an uncertain world this is impossible. Experience shows that different people will entertain widely divergent expectations. This will be so not merely because some men are, by temperament, optimists and others pessimists. Differences in knowledge are here often of fundamental importance.
The diffusion of new knowledge is not a uniform and not often a continuous process. Some sources of knowledge are only available to some, but not to others, while the ability to make use of new knowledge is most unequally distributed among men. For all these reasons expectations in an uncertain world are bound to diverge.
But divergent expectations cannot all be fulfilled. Some are bound to be disappointed. The plans based upon them will fail. Some plans will be even more successful than their makers had expected. In either case the planners will not be in equilibrium over time.