The New School for Social Research at 100: A view from the Econ. Dept.

From a late 1990s catalogue; Lance Taylor (center), and also in no particular order

and from what I can remember (Ellen Houston, Adalmir Marquetti, myself (with goaty

on the left side), Margaret Duncan, Josh Bivens and Carlos Bastos (Orozco Room)

The New School for Social Research was founded 100 years ago by a group of academics dissatisfied with the direction of American higher education. Economics was central to the early history of the New School, and my brief, very incomplete, and certainly idiosyncratic historical account emphasizes the Economics Department of what used to be called the Graduate Faculty.

Thorstein Veblen, one of the founders, had written his famous Higher Learning in America, which in a sense is the original critique of the corporate university. The idea was to put learning at the center, and avoid the conventional trappings of universities, with no degrees provided to students. The foundations of the critical perspectives provided at the New School came from institutionalists (like Veblen), pragmatists, represented by another prominent founder, namely John Dewey, and revisionism in history, with Charles Beard as its main voice at the new institution. Many came from Columbia University and were dissatisfied with both institutions of higher education and the direction the country had taken, in particular with World War I. These were mostly anti-war, progressive social scientists.

Perhaps the key person at the inception of the New School was Alvin Johnson, a somewhat difficult to classify economist (Gonçalo Fonseca at the HET website suggests that he might be seen as Austrian), that has been almost completely forgotten. Johnson was the editor of the massive Encyclopaedia of the Social Sciences, later substituted by the International Encyclopedia of the Social Sciences (last edition under Sandy Darity, and I have two entries on Export Promotion and James Mill), which put him in contact with several economists around the world, many in Germany.

A group of scholars that he met as the editor of the encyclopedia was the basis for the so-called University in Exile, which eventually was the basis for the Graduate Faculty, the division that now still is called the New School for Social Research (while the whole is just The New School, if I do understand the naming changes at my alma mater). The most important and cohesive group of economists that arrived at the New School in 1933, and the following years, escaping persecution in Nazi Germany, were the ones related to the Kiel School, including Gerhard Colm (on Colm I co-authored this paper with Luca Fiorito), Adolph Lowe, Jacob Marschak, and Hans Neisser. In that group, Lowe, the mentor to Robert Heilbroner, was to be the more consequential for the New School.

The New School was not orthodox in its economic teaching, but the 1930s were a period of flux in the profession. The Keynesian Revolution was in course, and Keynes was acquainted with Johnson and the New School, as it can be seen in the letter he gave to H. G. Bab (see below; click to amplify). In that sense, while it is true that the place was somewhat unorthodox, given its origins and the historical period in question, that should not be exaggerated. Note that Marschak went on to be the head of the Cowles Commission, and a leading mainstream economist. While at the New School he supervised Franco Modigliani's doctoral thesis, which was the basis for his famous neoclassical synthesis paper of an ISLM model with rigid wages and for his Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

The New School, more enjoyable and compatible people than at Columbia, for sure (click to enlarge)

I say this because there is a tendency to think of the New School as being always heterodox, and taking that term to have more or less a contemporary meaning (for what I mean about that go here; for a great and more in depth discussion see this post by Ingrid Kvangraven and Carolina Alves). Many others taught at the New School in this period, perhaps, worth mentioning is the case of Abba Lerner, the main author of the functional finance school (something that is at the core of Modern Money Theory, but is more restrictive and specific than MMT).

The Kiel School was what one could term eclectic. They certainly had roots on elements of the German Historical School, and readings of marginalist and non-marginalist authors, including Marxists. Gonçalo puts Tugan-Baranovsky as one of the influences on the Kiel School. Tugan, a "semi-critic of Marx" according to Schumpeter, argued that a disproportion between the investment and consumption goods sectors would lead to recurrent industrial crises, and that notion of structural imbalances was central for Kiel authors. Leontief was also connected to the Kiel School.

While many in the Kiel School were open to and used marginalist concepts, as in the case of institutionalists, not all were neoclassical, and Lowe's views arguably were the most clearly connected to the works of the old classical political economists. Ed Nell, in the appendix to Lowe's book The Path of Economic Growth compares it with Leontief, Von Neumann, and Sraffa, as being classically inspired. One can think of Ed's Transformational Growth research program as building on that tradition.

But it would be a stretch to suggest that Bob Heilbroner, Lowe's main disciple at the New School, and the next key person in the history of the Economics Department at the Graduate Faculty, was a follower of classical political economy. A cursory reading of his classic, The Worldly Philosophers, shows that his reading of Smith is perfectly compatible modern mainstream readings, which imply that Smith was a precursor of supply and demand theories. The chapter on Smith discusses the law of markets, but the labor theory of value only makes an appearance in the chapter on Marx, and to suggest that it was a deviation from Smith and Ricardo. The degree to which Heilbroner conflates classical and marginalist or neoclassical theory is clear in that he argues that the Walrasian circular-flow in Schumpeter's theory resembles Ricardo's stationary state. And in the discussion of Schumpeter's notion of profit he suggests, regarding the labor theory of value, that "everyone knew to be wrong and therefore did not have to be reckoned with."*

Further, his views on economic growth, as evidenced in his book on the economics history of the Unites States, were essentially that growth was supply-side constrained and dependent on technological innovation, in ways that seem to be closer to his Harvard undergraduate teacher, Joseph Schumpeter, than classical political economy authors (Smith had, arguably, a demand driven view of growth, at least for some, while Ricardo most certainly didn't, and Marx is open to many different views; I'll keep that to another post). I emphasize this to show that even if he was unorthodox in many ways, Bob was not necessarily what we would term heterodox in the modern sense of the word (even if taken loosely as not being neoclassical).** In my view, no clear heterodox bias existed up to the 1960s, in a department that had basically been under the shadow of three economists, Johnson, Lowe and Heilbroner. Note that this somewhat eclectic persistence of different approaches was more or less common in many departments at that time.

But the Johnson-Lowe-Heilbroner nexus provided the basis for the changes that shaped the department with the arrival of Ed Nell in the late 1960s. Ed had worked with Hicks at Oxford, and he was from early on critical of methodological individualism, something that is clear from his critique of the concept of the rational economic man. More importantly he was concerned with growth, and that led to a discussion of the theories of value and distribution (perhaps influenced by Hicks' Capital and Growth, which remains an important book), and was influenced by Sraffa's revival of classical political economy. It was after Ed arrived that a series of new hires, among them Stephen Hymer, Anwar Shaikh, and David Gordon, changed the department. Note that the late 1960s and early 1970s too is the period in which the economics profession segregates the heterodox groups, makes it harder for radicals to get tenure in conventional and prestigious departments (e.g. Sam Bowles at Harvard), and publishing requires the foundation of new journals (e.g Journal of Post Keynesian Economics, and the Cambridge Journal of Economics).

In my view, it is no coincidence that this is also when the change in the notion of equilibrium, as discussed by Garegnani, takes place (some discussion of that here). The point is that the capital debates had shown the limits of marginalist (neoclassical) economics, and the profession embraced what I have referred to as vulgar economics after that. The hiring of heterodox economists, critical of the mainstream in this period, and the sociology of academia, locked in heterodox hegemony at the Econ. Dept. of the Graduate Faculty.

Many other heterodox economists taught at the New School's Econ. Dept. from that point onwards. I might note Paul Sweezy, which if I'm not wrong was instrumental in making Bob Pollin choose the New School for his PhD, was among the teachers in the 1970s. And also many Sraffians like Piero Garegnani, John Eatwell, taught on a recurring basis, while many were visitors for shorter periods. Again, somewhat idiosyncratically, in my view it is the arrival of Lance Taylor in 1993 and a few years later of Duncan Foley that consolidated the persistence of the heterodoxy, and the type of heterodox department (with a mix of structural Keynesianism and Marxism), that the New School has today.

Perhaps, it is important to emphasize how limited this story is. There is a missing story about the role of David Gordon, who was also a key player in the department for many decades, and of Anwar Shaikh, that I always saw as somewhat of an influential outsider (maybe I'm wrong), even by the New School standards. And also the many other wonderful and creative heterodox economists that passed through the New School over the years. There is a question about the gender imbalances at the New School, and within heterodoxy itself, that I do not address. I'll explicitly avoid saying any additional names, since in this way I cannot be accused of forgetting someone (I'm leaving out a ton, including the many alumni that went on to remarkable careers). Hopefully this provides a window on how the New School became heterodox and why it remains so.

* It should be noted that Bob's book was published in 1953, a few years before the labor theory of value was rehabilitated by Sraffa's Production of Commodities.

** On a personal note, I remember talking to Bob on an interval of a conference organized by Ed Nell on functional finance, in 1997, I think, in which he argued that the Maastricht limits (3 per cent for deficits, and 60 per cent for debt) were reasonable measures to constrain the size of government. He was a liberal in an older sense of the word, perhaps.

On Marx and Keynes, the NAIRU and Say's Law, again

Many of the entries in this blog directly or indirectly deal with the relation between the old classical authors of the surplus approach and the more radical authors that followed after the Keynesian Revolution (see here, for example).  David Fields has pointed out this post by Michael Roberts on Marx and Keynes, from a Marxist point of view (after a debate with someone he refers to as left post-Keynesian).

This is not a bad post at all. The interpretation of Keynes given by the post-Keynesian author (in Roberts' description) is not the best, but it is one of the possible interpretations for sure. The unknown postie also correctly notes that:

"Keynes and Marx were united in their critique of Say’s law (that supply creates its own demand) as a common starting point for theorising about the possibility of insufficient effective demand and the realisation problem."

Which is important to emphasize, since some Marxists tend to have an attachment to Say's Law. In this respect the postie [again in Robert's description of what he said] is actually unfair to Marx and Ricardo, suggesting that:

"But he [Marx] did (like the other classical political economists) expected the economy to always tend towards full capacity utilisation even if he (like Ricardo) theorised about technological unemployment in an economy operating at full capacity utilisation."

Actually there is no indication that Marx or Ricardo suggested full capacity utilization. Ricardo's version of Say's Law does not require full employment, and there is no mechanism to bring investment to the level of full employment savings. Investment equals savings by definition, and it might be at a level with significant levels of unemployment and spare capacity. Reductions in the real wage or the rate of interest would not bring about full utilization of resources. That's a concept that appears only with Marginalism.

When Roberts comes to his argument, it starts with a discussion of Keynes' political position (saving Capitalism) rather than the analytical elements of his theory. Then he discusses the limits to Keynesian policies, which he narrowly defines as fiscal activism (note that this could have been the position of an Old or New Keynesian, defending fiscal activism on the basis of market imperfections). Roberts misses the radical component in Keynes analysis, which implies that market economies are NOT efficient in the allocation of resources, and that long-term equilibrium could imply unemployment (yes long-term equilibrium unemployment, not disequilibrium, and not short-term unemployment is Keynes' central proposition).

Further, Keynes' Principle of Effective Demand requires to be fully operational the abandonment of the neoclassical (Marginalist) theory of distribution, since variations of the rate of interest (or the real wage) do not lead to full utilization of capacity, and are compatible with a coherent recovery of the old and forgotten theories of the classical authors and Marx. So, complementing the postie, Keynes and Marx are united, not only the rejection of Say's Law, but also on the need for an alternative to the Marginalist theory of distribution, one in which conflict is necessary.

Keynes didn't get to this point, but understood the need of getting rid of the natural rate of interest concept. And that leads to an abandonment of the neoclassical theory of distribution per force.

Then Roberts gets to his main point. He says:

"Keynes says the crisis comes about through a lack of ‘effective demand’, namely an unaccountable fall in investment and consumption and this causes profits and wages to fall. Marx says: let’s start with profits. If profits fall, then capitalists would stop investing, lay off workers and wages would drop and consumption would fall."

This is a variation of the traditional Marxist theory of the business cycle. There are multiple versions, from Andrew Glyn profit squeeze to Goodwin predator prey (which by the way suggests full utilization of resources in his model in Marxo-Marginalist fashion), and many others. All rely, like Roberts above on the notion that the rate of profit (or the profit margin in Marglin and Bhaduri) drives investment.

In this case, high employment generates wage inflation which can increase the wage share of workers in output; but this will, in turn, reduce the profits of capitalists and thus reduce future investment and output, leading to a recession. The recession, in turn, reduces labor demand and employment and consequently leads to lower wage inflation or even deflation and reduces the wage share of workers. But as workers wage share declines, then profits increase and, with them, investment and a new boom starts.

There are a few problems with this view, the profit-led view of investment, discussed here before (and here). As mentioned before, from a theoretical point of view, it is difficult to justify why a firm would invest, even if the rate of profit is high, if demand is not growing. And, in reverse, why would a firm not invest, and increase its capacity, if demand is growing even if the rate of profit is relatively low. Wouldn't it make sense to keep pace with demand, rather than let the competition take advantage of expanding demand? From an empirical point of view (as noted here, and here) the accelerator principle rules the roost.

Finally, note that all of the profit-led based theories of cycles and growth are fundamentally dynamic Say's Law stories, in which savings, determined by profits determine the behavior of investment, and the system fluctuates around a level of output in which worker's bargaining power does not lead to inflation, or in other words stable inflation. That is the so-called Marxist version of the NAIRU (see my previous post on the late Andrew Glynn on the subject; for a relatively recent Marxist defense of the NAIRU see Pollin here; subscription required). As I noted before (and here) there are reasons to be skeptical about the Phillips curve and the NAIRU, in all their versions.

PS: Comment by Franklin Serrano, that I paste in full:

"In Marx there is indeed no indication of a tendency to full capacity utilization nor full employment of labour. But the author is right about Ricardo. Ricardo assumed Say's law which means that all that "demand is only limited by production", this DOES imply that investment is equal to and determined by full capacity savings as in Ricardo it is only capital (full capacity) not labor that determines potential output. Ricardo did NOT contemplate "spare capacity"  and yes his technological unemployment was based on the fully capacity output not generating enough jobs for the economy to get to full employment. You are right that in Ricardo investment does not adapt to full employment savings. But it does adapt if arbitrarily to full capacity saving."

Same issue brought up by PGB below. I conflated full capacity with full employment. Mind you, I suspect that this is what the post-Keynesian author referred in the post was doing, and hence my mistake.

Bob Pollin on debt and growth

In a recent interview with Dollars & Sense Bob Pollin says about the debate with Reinhart and Rogoff on the relation between public debt and economic growth:

"The heart of the matter is that when you’re borrowing money you can use it for good things or bad things. You can be doing it in the midst of a recession. If we’re going to invest in green technologies to reduce carbon emissions, that’s good. 

We also need to ask: what is the interest rate at which the government is borrowing? The U.S. government’s debt servicing today—how much we have to pay in interest as a share of government expenditures—is actually at a historic low, even though the borrowing has been at a historic high. The answer obviously is because the interest rate is so low. When you’re in an economic crisis and you want to stimulate the economy by spending more, does the central bank have the capacity to maintain a low interest rate? In the United States, the answer is yes. In the UK, the answer is yes. Germany, yes. In the rest of Europe, no. If you can borrow at 0%, go for it. If you have to borrow at 9%, that’s a completely different world."

Read the full interview here.