Chapter 9 Section 2 Economics Needs a New Revolution
Economics is a science and as such has revolutionary attributes.Marshall, a professor of economics at the University of Cambridge, made a comprehensive synthesis of past economic theories. In 1890, he published a book that ushered in the era of economics. Since then, economics knowledge has begun to be systematized.Keynes praised Marshall in this way: "He is the first truly great economist who has never been seen before. He devoted his life to building this subject into an independent science, so that it has its own foundation, and like physics or biology. With a high degree of scientific precision." By the 1960s and 1970s, economics had become a discipline that met the requirements of science for its internal logic and coherence.The "refinement" and "crisis" of economics are the two early stages of the "revolution" of the economic paradigm.Both the "Keynesian revolution" and the neoclassical economics revolution were revolutions that occurred when the norms or research methods of the time were challenged.In a word, the revolution of economic paradigm is the only way for the development of economics.
I have personal experience of an "economics revolution".The concept of capital is not born, it is gradually developed.In a macroeconomic world, the concept of "total capital" exists as a result of neoclassical economics' triumphant economic revolution.When I was studying for a Ph.D. in Cambridge, I applied the aggregate production function based on total capital to enterprise research, but one of my advisors, Professor David Newbery, former head of the Department of Applied Economics at the University of Cambridge, strongly opposed it.I took out many papers written by American economists using the aggregate production function to analyze enterprises, but he still disagreed.It was only later that I realized that in the late 1950s, the "two Cambridge disputes" broke out in the field of economics and lasted for 20 years.Harvard University, a graduate of the University of Cambridge in the United Kingdom, donated money to create today's Harvard University in the United States, and called the local town Cambridge.The leading figure of the British Cambridge School is Madame Joan Robinson, and the leading figure of the American Cambridge School is Professor Paul Samuelson of Harvard University. At the heart of the "two Cambridge disputes" is the existence or non-existence of the concept of "total capital".Cambridge, England does not recognize the concept of total capital, so it does not recognize the total production function.Later, American Cambridge (Harvard University) gained the upper hand, and the aggregate production function was introduced as Kant's "transcendental rationality" to almost all economics students after the war, while British Cambridge gradually faded out of the historical stage.
Economic activities are the most basic activities of human beings.Keynes once said: "If we look back instead of looking into the future, we will find that economic problems and the struggle for existence have hitherto been the first and most pressing problems of mankind - not only in man, but in the whole biological world. , from the most primitive form of life.” Economic policy is one of the main factors affecting human economic activities.Economic policy is greatly influenced by economic thinking.Keynes was a student of Marshall and another master of the episode after Marshall. He did not finally say the taboo of "how wonderful life is" like Faust, but the "taste" of economics.He said: "The ideas of economists and political philosophers, when they are right and when they are wrong, are more powerful than is commonly assumed. Indeed, they rule the world. Be practical. People who think they are immune to any theory are often the captives of some dead economist. The crazy people in power who listen to opinions on the air mostly have their crazy ideas from academia some years ago. from the writings of bad writers...for in economics and political philosophy not many people are affected by new theories after the age of twenty-five or thirty. But sooner or later, for better or for worse, the danger The thing that matters is not vested interests, but ideas.”
Economic thought largely rules the economic world and has a major impact on economic policy.Looking back at the history of economics over 200 years, we can see this clearly.
Say's Law states that "supply creates demand".Classical economics misunderstood Say's law and believed that the aggregate supply curve is vertical, and the aggregate demand curve is automatically balanced through price adjustment, and the world is in Walrasian general equilibrium.As early as the 19th century, Adam Smith's famous statement about the "invisible hand" spread all over the world. The then British Prime Minister said to Adam Smith: "We are all your students." Marshall also reiterated in The concept of general equilibrium.
The revolution in economics can be expressed succinctly in terms of aggregate supply and aggregate demand models.Actual output is usually determined by both aggregate supply and aggregate demand.The aggregate demand curve represents the determination of aggregate demand at a given price and slopes downward to the right.The aggregate supply curve reflects the price level for a given quantity of output.The scientific revolution in economics has actually been based on long-run supply-side assumptions, and that's where the differences lie.As Figure 1-7 shows, the aggregate-supply curve in classical economics is vertical both in the short run and in the long run.Therefore, the government's attempt to pull the aggregate demand curve will only lead to inflation, and will do nothing to increase aggregate output.In this case, the best economic policy for the government is to let things run their course and let the "invisible hand" run free.
In 1926, in "The End of Laissez-faire", Keynes made a profound and brilliant critique of laissez-faire economic thought: "The idea of the extraordinary harmony between private interest and public welfare is already evident in Paley. , but it is economists who have given this view a sound scientific basis. Imagine that, under good conditions of freedom, through the operation of the laws of nature, individuals, while pursuing their own interests, always tend to advance the public Welfare! Our philosophical difficulties are thus solved--at least for the practical man, who can now focus his efforts on securing the necessary conditions for liberty. In the philosophical doctrine that the government has no right to interfere in private affairs and the government To the sacred creed that there is no need to interfere in private affairs, there is now added the scientific justification that interference is worthless."In the beautful world of classical liberalism, where a spontaneous market mechanism that regulates labor supply and demand with changes in wages automatically creates full employment, economic recession and involuntary enterprise do not exist.
In October 1929, the U.S. stock market crashed. From 1929 to 1933, the world experienced the worst and longest economic depression in history.For nearly a decade from 1929, unemployment remained high.Classical liberal economic theory cannot explain the Great Depression, nor can it provide effective countermeasures to get out of it.As a result, mainstream classical economics is in crisis, and society urgently needs a scientific revolution in economics.
In economics, the brand identity of a school seems to be inherited in one continuous line, such as the Austrian school and the Chicago school's belief in the "invisible hand".However, Marshall, a professor at Cambridge University, refined classical economics into a norm recognized by the "economist community", but no one thought that it was Marshall's own favorite student Keynes who broke this norm.
Keynes was very concerned about real economic issues and was enthusiastic about economic policy research.After his death, he left a will requesting the establishment of the Department of Applied Economics at Cambridge University, which shows his emphasis on the application value of economics.In 1936, in the spirit of challenging the tradition, he published the book "The General Theory of Employment, Interest and Money" and launched the "Keynesian Revolution".He attacked Marshall's point of view, and believed that due to the stickiness of prices that are easy to rise and difficult to fall, the aggregate supply curve is not vertical, but slopes upward (as shown in Figure 1-8).The economy is in recession, not because of a supply-side problem, but because of "insufficient effective demand."Keynes believed that if the government does not intervene, it is tantamount to allowing insufficient effective demand to continue to exist, and allowing unemployment and recession to exist for a long time.Indeed, in the long run, prices will eventually slowly fall to an equilibrium state where demand equals supply, but as Keynes said sarcastically, "in the long run, we are all dead."The government must adopt fiscal policies to stimulate the economy, increase investment, and make up for the lack of effective demand.He founded macroeconomics, also known as the "Keynesian Revolution" of economic theory.
In 1985, when Paul Samuelson recalled the great changes in economics at that time, he pointed out: "Economists were born at the right time in 1932. Economics is like Sleeping Beauty. Her awakening is waiting for new methods and new paradigms. , A kiss between a new expert and a new problem. Science is like a parasite. The greater the number of patients, the greater the progress in physiology and pathology, and the cure can be developed from pathology. 1932 was the bottom of the Great Depression, From this fertile soil slowly grew a new discipline known today as macroeconomics. Am I talking about the Keynesian revolution? Of course."
Keynes said in the preface to the book "The General Theory of Employment, Interest and Money", "I named this book "The General Theory of Employment, Interest and Money" to emphasize the prefix 'Tong'. The purpose of this name is to put The character of my views and conclusions on some issues is contrasted with that of the classical school, which has dominated the economic thought of my generation in the ruling classes and in the academic circles, both practically and theoretically, for more than 100 years, and I myself It also grew up under the influence of the classical school. What I will explain is: the hypothetical conditions of the classical school can only be applied to specific situations, but not to general situations. This hypothetical situation is just a variety of possible equilibrium positions Moreover, the special circumstances assumed by the classical school are not characteristic of the economic society in which we actually live, and its teachings will be misleading if we try to apply them to empirical facts , with catastrophic consequences".
During the 35-year period from 1936 to 1971, when classical economics was gradually eclipsed, the "Keynesian revolution" succeeded, and the standard policy prescription for recession and involuntary unemployment was an active fiscal policy proposed by Keynes. In the 1950s and 1960s, economics as a science was at the height of its power, and the economist community was enjoying itself.Even then US President Nixon once said humorously: "Now, we are all Keynesians!"
Before President Nixon could speak, in 1971, countries such as the United States and Europe fell into the embarrassing situation of "stagflation".The "abnormality" of economics appeared, and economics fell into a scientific crisis again, and the mainstream Keynesianism began to be questioned. In 1985, Paul Samuelson vividly described the state of affairs in a lecture: "Trees don't always grow to the sky. Every long Kondratieff wave has its point of regress. From 1932 to After the 1965 period of expansion in the identity and self-esteem of economists, the darker years followed. We became more humble, and, as Churchill said, we have a lot to be humble about. The continued inconsistency of stagflation has disillusioned many non-economists and, frankly, dampened our complacency. We hunt around for new theoretical paradigms, like alchemists hoping for the golden touch. A new magic weapon. A poor paper by the National Economic Bureau does not necessarily mean that it is not interesting; a difficult paper does not mean that it is valued.” In the case of Keynesianism in crisis, The neoclassical revolution in science broke out.
The Chicago School advocates the full recovery of "laissez-faire" and its representative is the 1976 Nobel Laureate in Economics and professor at the University of Chicago M. Friedman.Friedman believed that the issuance of additional money was inflation in the long run, and attributed the Great Depression of the 1930s to the fault of tight monetary policy. One of the major achievements of microeconomics in the 1970s is to prove in theory that when individuals pursue their own welfare maximization, they maximize social welfare.Through Adam Smith's "invisible hand", efficiency and welfare do not have a trade-off relationship, but are unified.This proof makes microeconomics reach the highest level of aesthetics.At the same time, neoclassical macroeconomics was developed, combining macroeconomic theory with microeconomic foundations, and made important achievements. Microcosmic mechanisms such as the "money illusion" were proposed, indicating that the aggregate supply curve is inclined in the short term and vertical in the long run. (See Figure 1-9), which means that the Keynesian demand management policy is only effective in the short term, and will not promote employment in the long run, but will instead lead to high inflation.
Due to the use of the important model of "rational expectations" to describe the formation of expectations, the "rational expectations school" emerged, emphasizing the credibility of monetary policy.A classic example is "inflation bias".When a country’s central bank publicly announces that the inflation target is 5%, if companies and individuals believe in the promise of the monetary authority, a rational central bank will have fiscal incentives to quietly issue more currency to bring inflation above 5%. This results in an "inflation tax".But companies and individuals are also rational. After being cheated once, they will not believe the promise of the central bank, so the equilibrium inflation in the economy is higher than 5%.Therefore, reaching a sad suboptimal outcome in an economy where everyone is rational is equivalent to the "prisoner's dilemma". The economic thinking of the "rational expectations school" has a great influence on reality, especially on monetary policy.For example, the European Central Bank has largely targeted inflation in order to bolster its own credibility, successfully suppressing “inflationary bias” while being widely criticized for being unresponsive to growth and unemployment.Although neo-Keynesian economics uses micro-mechanisms such as "menu costs" and "efficiency wages" to explain the right-sloping aggregate supply curve, the impact is far less than that of neoclassical economics.
In the 1970s, Wanniski, the editor of the Wall Street Journal, coined the term "supply-side school" and wrote the book "How the World Works".Since then, the "supply-side school" has become a unique school of economics that challenges neoclassical economics.The supply school believes that Say's law is completely correct, and the economic situation does not depend mainly on whether the demand is sufficient, as Keynesian and neoclassical economics think, but on the "supply side", that is, whether the enterprise is dynamic and individual Whether there is enthusiasm for work; therefore, the government's main measures to promote economic development should not be to use fiscal policy or monetary means to increase demand, but to tilt towards the "supply side". Through tax cuts, enterprises can increase their competitiveness and individuals can increase their enthusiasm for work .As shown in Figure 1-10, through policies such as tax cuts, the "supply school" believes that the aggregate supply curve will shift downward to the right. If the aggregate demand curve does not change, then in the absence of inflation, aggregate output will increase.However, the "supply-side school" emphasizes the "superiority" of a given general-purpose technology, does not pay attention to the possible revolution of technology, lacks major innovations in theory, and cannot shake the dominance of neoclassical economics.However, the policy impact of the "supply-side school" unexpectedly exceeds its theoretical achievements.
In 1980 and 1981, British Prime Minister Margaret Thatcher and US President Ronald Reagan came to power successively, and both adopted the "supply-side school" policy.Beginning in 1984, Mrs. Thatcher implemented large-scale privatization of state-owned enterprises in the United Kingdom, while reducing the level of social welfare, which revitalized the British economy to a large extent and avoided the European "sclerosis". At the end of 1980, Reagan came to power, deregulated, strengthened competition, vigorously supported small businesses and other policies to stimulate the enthusiasm of supply, to improve the vitality of enterprises, and objectively promoted the transition of the US economy to an information economy. In 1984, the U.S. economy rebounded surprisingly and got out of "stagflation". After experiencing a brief recession in 1991-1992, it began nearly 10 years of high economic growth.
Paul Samuelson once pointed out that neoclassical economics revolutionized Keynesian economics, "Through the works of Lucas, Sargent, Barrow and others, the new classical school has made 180% of the principles of the earlier Keynesian school. However, today, whether it is monetary theory, the eclectic mainstream Keynesian school or the rational expectations school's equation, if it is compared with Walras and Marshall or the two neoclassical teachers I am in Chicago Knight and Viner Compared with the equation, the difference is really different."
In 2003, Robert Lucas Jr., the Nobel laureate in economics and the leader of the "Rational Expectation School", announced at the annual meeting of American Economics with pride: "The core problem of preventing depression has actually been solved. Just pay attention to the supply side.” In 2007, the lingering sound of Lucas’ prediction was still there, and a subprime mortgage crisis quietly broke out in the United States. In July 2007, after the Dow Jones Industrial Average rose above 14,000 points, it plummeted all the way.Beginning in 2008, the US subprime mortgage crisis evolved into a world financial crisis, which quickly spread to the real economy and developed into a world economic recession.Since the Great Depression of the world economy in the 1930s, the world economy has never experienced such panic and recession. Krugman, the 2008 Nobel Laureate in Economics, said in early 2009: "There is no depression yet, and despite all the ominous signs, I don't think we will be in one. But we It's really gone deep into the realm of depression economics." The occurrence of a depression is incomprehensible to neoclassical economics.
Unfortunately, until today, human beings have not solved their own economic problems. In 2009, the world was in the midst of a once-in-a-century financial crisis. The International Labor Organization estimated that the number of unemployed people in 2009 was as high as 50 million. China was not immune to the crisis alone, and the employment problem of migrant workers and college students was particularly prominent.Human beings still have lingering fears about the world's Great Depression from 1929 to 1933. Facing the world financial crisis since 2008, they feel confused and fearful about the future.Keynes, a master of economics who graduated from Cambridge, lived during the Great Depression that began in 1929. In the second article of the fifth part of his book "Prophecy and Persuasion", "The Possible Economic Prospects of Our Future Generations", he wrote profoundly: "The pervasive worldwide depression, the extraordinary magnitude of unemployment in a world of poverty, the catastrophic mistakes we have made, have all blinded us to what is happening beneath the surface. Turn a blind eye to everything that is going on, and turn a deaf ear to the real explanation of the way things are going." What makes us lose our insight?Our mistake is that economic thinking cannot keep up with the rapidly changing world. The way to regain insight is to get rid of old ideas and accept new ideas.
On October 30, 2008, the famous scientific journal "Nature" published an article "Economics Needs a Scientific Revolution" by Jane Philip Bouchard, a physics professor and a hedge fund manager. Head of research.The opening of the article raises a very serious question. Compared with the countless successes of physics in the last few hundred years, the number of successes in economics is pitifully small.Relying on physics, humans can land on the moon, and nuclear reactors can provide energy to thousands of households. There are countless similar examples, but what classic achievements can economics give?Economists have come up with plenty of perfect mathematical models to explain the world, but the problem is that none of these models can predict the Great Depression, let alone the current world financial crisis. "Economics is in crisis and needs a scientific revolution," said a commentator on the article by the editor of Nature.
Neoclassical economics cannot explain the Great Depression in 1929 and the world financial crisis since 2008.In response to the recession of the real economy brought about by the world financial crisis, countries such as the United States and the United Kingdom, which once abandoned the Keynesian theory, introduced economic stimulus plans one after another.The words of U.S. President Nixon seem to have been fulfilled again, "Now, we are all experts of the Keynesian school!" It can be said that neoclassical economics launched a scientific revolution in the 1970s, and it was all the rage. After making valuable suggestions, today, just 30 years later, there is a scientific crisis.It took about 30 years from the peak of Keynesian economics in 1936 to its fall from the altar in 1970; it took about 30 years from the rise of neoclassical economics in 1971 to its fall from the altar in 2008.It is still an old Chinese saying, "Thirty years in Hedong, thirty years in Hexi".
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