11:   Our Visit to the Cambridge Conference

William Krehm

In response to more than a single great need, Conferences on Heterodox Economics are becoming a world-wide phenomenon. To the point in fact where their heterodoxy has begun developing a disquieting orthodoxy of its own. Universities on all continents are feeling the pinch of budgetary downsizing, and transforming the current disrepute of economics into a source of income is a brilliant if delicate operation. Franchises by their very nature exclude as much as they include.

And what university the world over has a vaster franchise than Cambridge that nurtured Newton and Keynes? Newton’s glory remains safe, and by the sheer force of personality Keynes goes on dazzling as during his lifetime. It is a grandiose doghouse to which he has been committed today by those who hold our economy in a throttling grip. The policies that won both the war and a good stretch of the peace are today decried by all major parties on both sides of the great waters. At the Cambridge Conference the way to Keynes’s office was clearly marked, but less evident were the rebellious stands that made Keynes Keynes: his recognition of the need for government investment not only to keep capitalism churning, but in the process of doing so producing a more just and durable society. And there was his ability – rare enough in the eye-gouging profession of economics – of scrapping previous certainties and admitting his debt to those whom he had dismissed as "unscientific" just a few years before: Marx, Gesell, Major Douglas.

Unfortunately, pressure from academic peers led Keynes to do his most basic thinking in a private manner, much as a gentleman does his ablutions. In the words of G.L.S. Shackle, "Keynes spared his readers, even in the deliberately provocative General Theory of 1936, the ultimate force of his conclusion uttered in speech, ‘Equilibrium is blither.’"

On reading the proofs of The General Theory, Roy Harrod, his future biographer, had offered this advice: "[Your] effectiveness is diminished if you try to eradicate every deep-rooted habit of thought unnecessarily. I am not thinking of the aged and fossilized, but of the younger generation. It is doing a great violation to their fundamental groundwork of thought, if you tell them that two independent demand and supply variables won’t jointly determine price and quantity. Tell them that we don’t known the supply function. Tell them that the ceteribus paribus clause is inadmissible and that we can discover more important relationships governing price and quantity in this case which render the s. and d. analysis nugatory. But don’t impugn the analysis itself."

Keynes’s Two Most Significant and Least-quoted Passages

Despite such advice, there are in The General Theory the two most significant and least-quoted passages of his entire output. One we referred to above.1 "The great puzzle of Effective Demand vanished from economic literature. You will not find it mentioned once in the whole of the works of Marshall, Edgeworth, and Professor Pigou. It could only live on furtively in the worlds of Karl Marx, Silvio Gesell or Major Douglas."

On page viii of the introduction there is a passage that must have been the fruit of much anguished rethinking, but no Keynesian seems to have read: "I sympathize, therefore, with the pre-classical doctrine that everything is produced by labour…. It is preferable to regard labour, including, of course, the personal service of the entrepreneur and his assistants, as the sole factor of production, operating in a given environment of technique, natural resources, capital equipment, and effective demand."

There is the nugget that would not only equip economics for dealing with the problems of deflation, which were foremost when it was written, but to the new ones of today. Ours has become a two-tiered world economy that brutally deflates the markets for real production to make space for the unbridled speculations of high finance. It diverts our attention from the root production for human needs to remote derivatives of them, i.e., the growth rates of the profits wrung out of their deflation. Incorporated into share prices, these commit our security markets to exponential growth. Since by definition these are as unsustainable as the atomic bomb, inevitably they crash.

That ignored observation at the very gateway to The General Theory might have warned us against the fate that has befallen our world.

Instead the "pure and perfect market" where supply and demand dance around equilibrium points has taken over. Everything else – all aspects of public investment in material and human capital have been declared "externalities," not depreciated over their useful life but treated as current spending. This leaves no depreciated asset to balance against the debt incurred for their creation.

Keynes Continues Bemusing the World for Lesser Reasons

The phenomenon of Keynes bestrode the world; his wisdom played a key role in mobilizing the Western world against the Nazis. Yet his fate is surely one of the most paradoxical in recent human history. His teachings were completely wiped out of official and even academic memories, but the man himself has continued bemusing the world, as though it were troubled by the injustice it had done to both Keynes and to itself. Biographies continue appearing, but the obsession is with the personality both in his Bloomsbury and Cambridge contexts, rather than his theories. Of the first volume of Sidelsky’s three-volume effort in the field, Keynes’s brother remarked – "Sidelsky took his entire first book to let us know that my brother was a bugger." His economic views, however, Sidelsky took little pain to understand.

That format of reverence was in evidence at the Cambridge Conference. The essence of his mature theory as transmitted in the above quotes did not show up at the sessions I managed to attend. Instead a far greater bias against mathematics as such turned up than against illiterally misused mathematics. One academic, whom I leave charitably unnamed, even referred to chemistry as a science "free of mathematics" that might be a possible model for economics. That disposes of molecular weights, isotopes, and indeed Mendeleieff’s table.

Few who read papers or discussed those of others disrupted the conventional view of the economy as a market surrounded by "externalities." These included activities like the household economy, the public sector, the environment, investment in human capital, social security, that are not driven by the search for maximized profits. All the greater surprise then, that Victoria Chick should have read a paper on systems theory, a subject that is quite the exact inverse of "externalities." For it brings these areas of the economy out from the cold and ceases treating them as mere food chain for the market. Recognized as essential for the system as a whole, they assume the status of subsystems. Of course, they must really be indispensable for the proper functioning of the entire socio-economic system. That requires a discipline for monitoring their reserve resources.

Entropy as in Niagara Falls

In the natural sciences such reserve resources are known as "negentropy," and if they are drained by another subsystem, "entropy" ensues. In the physical world, energy is always present in matter, but it can be harnessed only where a difference of potential – negentropy – exists. In the natural sciences too, there is a precise mathematical equivalence between the different forms of negentropy – chemical, thermal, electro-magnetic, nuclear. Between the negentropies of the different social-economic subsystems, that is not the case. There the notion of negentropy is essentially a metaphor, but a very essential one. Although the "fuels" or "food chains" of the various subsystems are very different, they do have some common factors. One of these is funding, that almost invariably comes from the government. Another such common need is an economic theory that sees everything indispensable to society as subsystems rather than externalities, that concentrates on the doughnut rather than on the hole.

That is what caused conventional economists to shun the very idea of systems theory that had become familiar among engineers and scientists. The compliment was returned by the systems theory people. Except for a brief period in the early 1970s when Jay W. Forrester and his colleague Meadows did a study on the subject for the Club of Rome, economists have been notable for their absence at conferences of the systems people. The attempt of Howard T. Odum and Elisabeth C. Odum, "to equate the flow of money with that of energy in an equal-value loop" as "the way human beings recognized that the flows are of equal value" is an echo of the equilibrium model of economics. It is unlikely that the total energy consumption in Shakespeare’s London was as great as that of a modern urban slum, and yet legacy it left to human survival to-day is proof that no such equivalence exists.

The title of Victoria Chick’s paper was "The Future is Open" and from that resulted a discussion of whether the future as seen through the lens of systems theory is open or closed. At the same time, from the floor came the statement, "Keynesianism has failed." I don’t know whether the person who expressed that view was from Cambridge or not, but no one from Cambridge rose to dispute it.

I attempted to find an answer by combining the two questions. Keynes had died in 1946, before the price effects of his policies could possibly emerge and hence could not have been addressed by him. Price controls were still in effect. And in 1951, a serious event took place in Washington. At this point Dr. Chick almost in unison with me gave that a name – the Treasury-Fed Accord: behind President Truman’s back proclaimed the independence of the Federal Reserve from the government, and gravely disturbed monetary creation. And in the 1960s immense public investments had to be made not only to catch up with the backlog of ten years of depression and six of war, but to introduce any number of new technologies. This caused a great need for additional public investment as we moved into a mixed economy. Thus the economic system is continually changing adding and altering subsystems, to benign or malignant effect.

Dr. Chick was good enough to recommend attention to my "efforts to recruit economists" to some of the points I raised in my paper. I was delighted to have possibly contributed to a deeper appreciation of Keynes in Cambridge. For elsewhere in the conference I had heard more of the flatulences of Lord Kaldor than of Keynes’s deeper doubts about conventional economics.

A Rating for Economic Conferences?

In what tiny portion of the great gathering that I was able to attend, another closely related theme emerged that has been central in my writings of the past 35 years. Isabel Salavisa of Lisbon, Portugal, read a paper on the economic role of the state and its future, that reached the conclusion: "It seems to me that this trend [towards the growth of public expenditure in advanced countries in the 20th century] is connected with the erosion of the external environment of capitalism, be it through the spread of capitalist relations across the world economy, be it through the progressive demolition of non-capitalist institutions in advanced societies. From the point of view of a systems approach, at the end of this process [the] capitalist system would turn into an isolated system. However, every system needs to pursue its exchanges with the exterior, under the form of matter, energy or information. And this is, in my view, the role of the state in advanced countries, and the fundamental explanation for its stubborn growth, against all recommendations, expectations and attempts. The state has become the main exterior of capitalism, ruled as it is by non-transactional principles, or at least by non-market principles. The magnitude of resources allocated through public agencies deserves careful examination. That is not the case. Rather it is treated as a black box, a quasi-isolated sub-system, a subject for control and manipulation. Opening that black box seems to me an urgent task."

Open that black box and such phenomena will jump out at you as non-inflationary price rise that merely reflects the increased taxation to pay for the spreading responsibilities of the state, the treatment of the growing investments of the state as current expenditure, and the resulting deficits that are largely the products of bad accountancy and of a freebooting private sector.

Notable, too, is the fact that systems theory is the only means of dealing with our key problems.

On the whole the conference ranked very high amongst the many I have attended. I propose in a future issue to draw up a list of ratings of heterodox economic conferences that I have recently attended. Such ratings are routine in the bond market. They are no less important in what claims to be the science of economics.

William Krehm

1. The General Theory, page 32.