Radical and Heterodox Economics (by Matías Vernengo)

Radical economics, the term as much as the theories behind it, is fundamentally a phenomenon of the 1960s and the academia in the United States, intrinsically tied to the upheavals of that transformative decade, in particular the Civil Rights movement and the war in Vietnam. The Union for Radical Political Economics (URPE) was the result of that boom in interest for alternative approaches to the mainstream. I don’t intend to write a history of URPE, in this brief post, but I want to contrast Radical Economics with the term Heterodox Economics, which has gained traction more recently (see Ngram viewer figure).

Interestingly enough, as much as the 1960s in the US in many ways completed the unfinished project of the New Deal, with civil rights legislation, a significant increase of health coverage with the Medicare/Medicaid programs, and the so-called War on Poverty,* the decade also saw the final onslaught of the Radical Keynesians in Cambridge (the UK one) on the neoclassical theoretical construct with Sraffa’s little monograph and the Capital Controversies. While the Keynesian Revolution of the 1930s suggested that unemployment equilibrium was possible and the economic system tended to fluctuate around suboptimal normal positions (showing that the natural rate of interest which equilibrated investment to full employment savings should be abandoned), the Capital Controversies provided the theoretical foundation for Keynes’ views by showing that it is truly impossible to obtain a univocal rate of interest related to the intensity of the use of capital.

In other words, while Keynes showed in the 1930s that employment was demand determined, and permanently high levels of unemployment in the absence of government intervention were possible, Sraffa showed that the remuneration of capital cannot be attributed to its marginal productivity [interest rates, capital remuneration were not linked with the productivity, intensity with which capital is used], and that it was open to the social and historical elements that are associated with the determination of the monetary rate of interest. Lower remuneration of capital (lower interest rates) and higher for labor depended on class struggle, as the old classical political economists and Marx had suggested, and all the social and historical circumstances that allow for that to happen. Samuelson, the doyen of the neoclassical establishment, accepted in a famous paper that Sraffa was correct (see here; subscription required).

The backlash against the Radical changes of the 1960s was as strong as it could be. Not only a strong Conservative movement developed, but by the 1980s they were entrenched in power (in fact, it was in the US and in many other countries a bi-partisan movement, with conservative Democrats being as common as anti-Keynesian Labour politicians in the UK, or conservative Socialists in countries like France and Spain, and in many developing countries too, like Cardoso in Brazil or the turn of Congress Party in India to neoliberal policies by the 1990s), and trying to roll back the reforms of the New Deal Era.

Contrary to what most people think the economics profession also changed significantly starting in the 1970s, as a result of the victory of Radical Economics in the 1960s. The conventional model that presumed that a long-term equilibrium with a uniform rate of profit and a natural rate of interest was established in perfect competition, was abandoned in favor of the intertemporal model, invented in the 1930s and used in General Equilibrium models (e.g. Arrow-Debreu), which was only peripheral up to that point. In this model, since there is no single capital good, but several, it was thought that the problems of the capital debates were sidestepped [they weren’t, but that’s for another more technical post to explain].

It was at that moment that the profession moved away from the fragile compromise between Keynesian policies, and neoclassical microeconomic foundations, and moved simply back to its flawed neoclassical underpinnings. Economists could sing the praises of the self-adjusting qualities of the free market even if the intertemporal General Equilibrium only argued that short-run equilibrium prices existed, and could not logically guarantee that markets did indeed provide for full utilization of resources (efficiency of sorts). It was the return of Vulgar Economics, the defense of the status quo on the basis of disguised ideology. New Classicals, Real Business Cycle authors, New Keynesians [a strange misnomer, that I’ll discuss in another post], and the more conservative Supply-Siders are the flip side in economics of the Conservative movement in politics.

From a sociological point of view that is when the Radicals in the profession were expelled, and had to create their new journals in order to publish (e.g. the Cambridge Journal of Economics, the Journal of Post Keynesian Economics, etc.), and when the traditional pluralistic stance that had allowed for token Radicals in mainstream economic departments was abandoned and Radicals  started to be squeezed out. The term heterodox economics became increasingly popular after that, in part to accommodate the various groups of dissenters that the mainstream unwelcomed (e.g. Institutionalists, Marxists, Post Keynesians, Sraffians, and even, if somewhat surprisingly since they are neoclassicals, Austrians; this leads to the confusion in many quarters that equate Austrians with heterodox groups).

In many respects the term Heterodox, which became more popular than Radical Economics (see graph) by the 2000s, is a defensive term, which conveys a front of groups that in a not necessarily coherent fashion criticize the Vulgar Economics that become the dominant approach in the profession [for a tentative approach to provide coherence to the notion of heterodox economics go here]. On the other hand, Radical Economics was the term associated to the completion of the Keynesian Revolution, and to the clear dismissal of the incoherent neoclassical approach, rebuilding economics’ theoretical edifice on the foundations of the old classical political economy authors.

The term Radical harks back to the 19th century British [Ricardo was a Radical, by the way] and later French chartist movements that wanted to expand political participation and develop democratic institutions. In that sense, the term Radical Economics adds coherence to a group that suggests that class conflict and the historical and institutional forces that circumscribe particular distributive regimes [say, for example, the revived Gilded Age in which we live, were union power is eroded, and financial interests are well-organized] cannot be well understood by the neoclassical notion that distribution results simply from market interaction, i.e. wages are low and profits are high because workers are not in demand and/or not productive, in contrast to capital.

Radicals are for an alternative way about thinking the economy, which correctly points out that markets do not, other than by mere chance, produce efficient outcomes, and certainly they do NOT lead to fair income distribution. And like the old Radicals of the 19th century, the suggestion is that the same participatory democratization of the political arena should take place in the economic field. It is a return to the kind of social science that is compatible with the economic gains made during the so-called Golden Age of Capitalism, between the New Deal and the 1960s, or between the Keynesian Revolution and the Capital Debates. Radical Economics is simply better science for more rational policymaking, and for a more humane and civilized society.

* The period from the New Deal and the recovery from the Great Depression to the rise of Conservatism is known as the Golden Age of Capitalism (or Les Trente Glorieuses–The Glorious Thirty–referring to the thirty years from 1945 to 1975 by the French). Not only the Welfare State developed in advanced economies, but in the periphery decolonization and rapid growth allowed for catching up with the advanced economies.

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