Friedrich A. Von Hayek in his Economics Nobel acceptance lecture 1974 had warned, “To act on the belief that we possess the knowledge and the power which enable us to shape the process of society entirely to our liking, knowledge
Friedrich A. Von Hayek in his Economics Nobel acceptance lecture 1974 had warned, “To act on the belief that we possess the knowledge and the power which enable us to shape the process of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm”. Almost four decades later, Ricardo J.Caballero, an economist with Massachusetts Institute of Technology, observed in his October 2010 paper “Macroeconomics After the Crisis: Time to Deal with the Pretense of Knowledge Syndrome”: “The root cause of the poor state of affairs in the field of macroeconomics lies in a fundamental tension in academic macroeconomics between the enormous complexity of it’s subject and the micro-theory-like precision to which we aspire… The old institutional school concluded that the task was impossible and hence not worth formalizing in mathematical terms… The modern core of macroeconomics swung the pendulum to the other extreme, and has specialized in quantitative mathematical formalizations of a precise but largely irrelevant world.”
There would be no economy without a constant inflow of natural resources like the sun and the atmosphere, the soil, the seas, fossil fuels, minerals, etc throughput in the system. Most classical economists had their vision of a “stationary state” — the ontological destination of economic growth and development constrained by the planet’s population exploration vis-à-vis finiteness of arable land and the exhaustibility of non-renewable resources. Humanity does not produce these “fictitious commodities” but exploits them, as observed by Karl Polanyi in his pathbreaking treatise The Great Transformation (1944). Simply by holding title to a portfolio of real property, without any effort to increase their value, one could quickly turn a profit from social investments, as revealed in classical prudence. Karl Marx’s entire critique of political economy is based on the contradictions between use value and exchange value. Marx established that the soil had no “indestructible powers,” as it could be degraded leading to ecological destruction.
Marxism was never a major force in United States. The primary challenge to the classical tradition came from what has since come to be known as neo-classical economics. The classical tradition of economic thought was ably synthesized and represented by one dominant figure of the age in America: Henry George. His 1879 book, Progress and Poverty sold more copies throughout the world than any book till that time except the Bible. George propagated that conflating land into capital allowed land rent to be concealed and diluted and the undeserving windfalls accrued to “leisure class” speculators and led to depression of labour wages at the margin. Following the classical tradition, George recognized that there is no justification for the titleholders to reap the return of what society has invested. George advocated for a progressive tax because land was mostly concentrated among the wealthy. Mason Gaffney in his 1994 book The Corruption of Economics has described how most influential oligarchy in late nineteenth century America, the railroad barons exerted their manipulative power to preempt the possibility of any rent extracted from land use. Leading Economics scholars engaged in establishing the American Economic Association (AEA) were induced to change definitions and to initiate two-factor (capital and labour) neoclassical economics denying land and natural resources’ contribution in production process. To oppose and alienate George from the domain of economics had been the preoccupation to the founding members of the AEA that fetched a grand success.
Frederick Soddy, recipient of Chemistry Nobel Prize in 1921, considered economics a pseudoscience requiring a paradigm shift and offered an alternative perspective on economics, rooted in the laws of thermodynamics. Contrary to mainstream belief, economy used to draw energy from outside itself and thus incapable of generating infinite wealth. Sody’s critique has been furthered by Nicholas Georgescu-Roegen in his magnum opus The Entropy Law and the Economic Process (1971). Georgescu-Roegen considered the economy as a living system that used to draw from its environment valuable or low entropy matter and energy adjusted by equal quantity of polluting high entropy matter-energy back to the environment.
Classical economics was concerned about scarcity of savings as well as dangers of overconsumption. Thomas Malthus was a remarkable exception within the classical tradition who promoted the idea that underconsumption causes recession. Based on Malthusian conviction, J.M. Keynes came forward to reverse under-consumption and oversaving during the Great Depression of the 1930s in his The General Theory of Employment, Interest, and Money. (1936) that government spending and subsidized consumer spending can compensate for “demand deficiencies”. Keynesian revolution aimed at long-term growth of national income through consumption, investment, incremental capital/output ratio without considering physical and energetic realities. An American economist Murray Rothband observed that Keynes “possessed the tactical wit to dress up ancient statist and inflationist fallacies with modern, pseudoscientific jargon, making them appear to be the latest findings of economic science.” Keynes’ misrepresented Say’s Law as “supply creates its own demand” as if it were a quotation from J.