Mammon & Morality

1.1 FRAMEWORK One may classify economic thinkers by their answers to two basic questions. The first, represented by the horizontal axis on the chart to your right, is which insight of the two insights listed above is more fundamental. Those that embrace the first insight -- the “no free lunch” principle -- tend to view economics as a study of equilibrium; the economy, left to its own devices, is in balance. Broadly speaking, this includes the Classical School (and its modern scions, the Neo-Classical and Rational Expectations Schools) and also Libertarian economic philosophies. Those that favor the second insight -- the whole is greater/less than sum of its parts -- stress the possibility of disequilibrium, such as theories of over - and underconsumption, general “gluts” and the persistence of market failure due to negative externalities. Keynesian economists, as well as economists who take a historical or institutional approach to economics. The vertical axis divides those economists who are mainly concerned with the economic consequences of individual decisions and economic activity from those who are primarily concerned with the political consequences. Some economic thinkers focus on the efficient economic operation of the economic system. Namely, they ask if factors -- labor, land and capital -- are employed and if they are employed most efficiently. Others note the power implications of different distributions of resources. For example, a libertarian economist would prefer a decentralized system, even if efficient, to a centralized economy that used resources efficiently because it maximized the political value of freedom. In contrast, an institutional economist might have a problem with power-differences in production or consumption, even if resources are used efficiently, because it is inequitable.

If we look at the boxes, we find the major schools of economic thought. In the upper right quadrant, we find the Classical school who, through doctrines such as Say’s Law and the Law of One Price -- exemplify the belief that the economic system tends toward equilibrium and the confidence that the stable equilibrium is also the most efficient equilibrium. In the upper left, we find the Keynesian (and proto-Keynesian) economists. They share the Classical school’s concern with economic efficiency -- and therefore share similar aims -- but disagree about the market’s ability to reach efficient equilibria without assistance. Keynesian are keen to note market failures, but suggest economic solutions (i.e., working through economic processes) to these problems by “finetuning” the economy through fiscal and monetary policy, “completing markets” or providing public goods.

In the lower left, there are Institutional economists that include the diverse perspectives of Marx, Veblen, and Schumpeter. They differ from Keynesian economists because they all put a priority on the distributional consequences of political and economic policies and processes. Marx’s theories put class conflict at the center of his analysis; Veblen is famous for his description of conspicuous consumption of the “leisure class” and the balance of power within corporations; Schumpeter on the transformative role of entrepreneurs. All emphasize the role of history and institutions in shaping economic behavior and all focus on some imbalance driving the evolution of economic activity. For Marx, it was the accumulation of capital, while Veblen it was underconsumption driven by the displacement of “engineers” by managers in corporations. Schumpeter noted the dynamic “creative destruction” of entrepreneurs driving unbalanced economic development. Finally, in the lower right quadrant are the pure laissez-faire perspectives of libertarian (Austrian) economists who often combine their economic analyses with a stress on the market’s role in preserving individual freedom, especially from centralized state planning. They emphasize the role of markets as information processing mechanisms.

While they hold different political values, they share the emphasis with Institutionalists on the implications of economics for preserving or undermining political values.

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