Simon Wren-Lewis has graciously replied to my post on mainstream economics’ flimflam and says he cannot find it (the flimflam). Here are some hints on where to look.
(1) A first con is the labeling adopted by New Keynesians. As I showed in my post, New Keynesianism has near-nothing to do with Keynes’s theoretical thinking as expressed in The General Theory. I too am not interested in an exegesis of what Keynes meant, but I am interested in honesty in labeling to help avoid damaging confusions.
(2) A second con is in the freshwater – saltwater characterization which gives the appearance of covering the full range of opinions, freshwater and saltwater being conventionally interpreted by ordinary folk as extremes.
(3) Marginal productivity theory remains at the core of mainstream distribution and production theory. However, marginal productivity can be adjusted for imperfect competition to yield, what might be called, adjusted marginal products. Thereafter, things remain analytically very similar and those adjusted marginal products then determine the stock demand for capital and drive long-run capital accumulation.
(4) The imperfect competition model of so-called New Keynesians continues to assert price and nominal wage flexibility would restore full employment. In a financialized economy with massive inside debts, that strikes me as an implausible proposition.
(5) Now to the big enchilada which I did not mention in my post because it would have confused an already difficult subject matter. Absent imperfect competition, price and nominal wage rigidity, and other market failures, the so-called new Keynesian model delivers Pareto optimal outcomes. In my view, the notion of making Pareto optimality the benchmark for describing and discussing capitalist economies is silly. Yet from the moment one enters an economics classroom that is the frame through which theoretical thinking is forced. The economist who tries to offer another theoretical frame and stands in the way of that juggernaut will be excommunicated by the mainstream. Excommunication explains why heterodoxy is not part of the mainstream curriculum, the so-called “top journals” do not publish heterodox articles, most economics departments have no heterodox economists, and the policy counsels of central banks are devoid of heterodox voices.
By Thomas I. Palley