The Economic and Labour Relations Review Vol. 20 No. 1, pp.

 1–6

The Rise and, Hopefully,

the Fall of Economic
Neo-Liberalism in Theory
and Practice
G. C. Harcourt *
I count it a great privilege to contribute the opening essay to this issue of The
Economic and Labour Relations Review, which is celebrating its first 20 years.
Over that time, the journal has been an outlet for independent and outspo-
ken, often unfashionable views, upholding traditions steeped in the thoughts
of Michal Kalecki and Maynard Keynes, and some of Australia’s wisest econo-
mists. (Even Karl Marx gets a mention.) I am most grateful to the editors for
asking me to be their opening bat.
Since the 1970s, we have seen the rise to dominance in theory and policy of
what Joan Robinson (1964) aptly dubbed ‘Pre-Keynesian theory after Keynes’.
In the economics profession, these phenomena have been especially associated
with the writings of Milton Friedman, Friedrich von Hayek and Robert Lucas, Jnr.
They have spawned many surrogates in the USA, the UK, Continental Europe,
Latin America, parts of Asia and, sadly, in the Antipodes as well. In the politi-
cal sphere, President Reagan, Mrs. (as she then was) Thatcher and, in Australia,
first, Bill Hayden and then Malcolm Fraser were instrumental in implementing
monetarist policies and, more widely, backing deregulation of financial markets,
freely floating exchange rates, lowering tariff barriers, and the removal of do-
mestic and international capital controls. Nor did Bob Hawke, Paul Keating and
their successors in the ALP avoid the virus. An era of international capitalism,
red in tooth and claw, was ushered in. Ruthless swashbuckling capitalists (indus-
trial, commercial and financial) combined with cowed and quiescent workforces
often arising from labour markets euphemistically described as flexible, came
increasingly to dominate economic and social life.
Commitment to full employment was downgraded or dropped altogether.
(I have mentioned before the infamous meeting at Melbourne University in
the late 1970s of eight or so Australian professors of economics, called by the
late Heinz Arndt, in order to do just this in Australia.) On the surface, control
of inflation through monetary policy became the dominant policy. Worship
of the free market as the institution for all seasons and activities became the
modern equivalent of the Golden Calf; Moses, the Law and the prophets (read

* Jesus College, Cambridge

2 The Economic and Labour Relations Review

Keynes and Kalecki) were argued to be discredited; they were despised or, at
best, neglected.
Why did all this happen? There are many interrelated causes and events,
intellectual, political and social. At the level of theory, a major factor in my view
was the tragedy that post-war generations of students of economics, especially
in the USA, were brought up on Paul Samuelson’s (and Alvin Hansen’s) text-
book versions of Keynesian economics instead of on Lorie Tarshis’s textbook,
The Elements of Economics. An Introduction to the Theory of Price and Employ-
ment (1947).
Lorie’s book was the first in the USA to contain an account of the economics
of Keynes: about 250 pages which were true to Keynes’s lectures when Keynes
was writing The General Theory (Lorie, then an affiliated student at Trinity Col-
lege, Cambridge, attended these lectures of Keynes in the early to mid-1930s).
Lorie’s account was true also to The General Theory itself. In particular, the
central core of Keynes’s analysis was presented in terms of Keynes’s aggregate
demand and supply analysis.
Lorie’s book was cruelly done (almost) to death by right-wing forces led
by Merwin K. Hart and, later, William Buckley, Jnr. so that many departments
that had initially proposed to set it as the text got cold feet and reneged.1 While
the first edition of Samuelson’s textbook (1948) still received the tail end of the
right-wing backlash, it did not prevent his textbook from dominating econom-
ics courses for the next 30 years and more.
Had Lorie’s book been the base on which the teaching of Keynes’s ideas
was erected, the stagflation episode of the 1970s could not have been said
to have discredited Keynes’s system. For an imported cost-price shock (or
an autonomous rise in money wages) could have been shown to have so af-
fected the position of Keynes’s aggregate supply function that, cet. par, both
the general price level would have been raised, and the levels of activity and
employment reduced. The former rise could have precipitated a price-wage
(and a wage-wage) spiral to go with the rise in unemployment. Nor could
the Phillips Curve have been regarded as an integral part of Keynes’s sys-
tem (Friedman’s so-called Keynesian missing equation). Indeed, as we know
from Keynes’s critique of Jan Tinbergen’s econometric work on investment
expenditure in the 1930s, the very idea of a dependable long-run relationship,
lasting over long periods of time, which could be used as the basis for policy
proposals, was thoroughly alien to Keynes’s thought (and, I suspect, to Bill
Phillips’s also) (Harcourt 2001: 183–187).
The subsequent attempts to derive Keynes-type results within a Walrasian
framework — by Don Patinkin and early Bob Clower, for example — led atten-
tion away from Keynes’s own essentially Marshallian approach to economic
theory and policy and made possible the rise of the neoclassical synthesis which
still receives some space in textbooks even today. (Clower and Axel Leijonhuf-
vud, to their great credit, changed tack to think again in a Marshallian context
and, as a result, have written fine papers which interpret and expand deeply
Keynes’s ideas.) But also in the wake of Friedman’s and especially Lucas’s in-
fluence, we find modern macroeconomics done more and more in terms of
The Rise and, Hopefully, the Fall of Economic Neo-Liberalism in Theory and Practice 3

representative agent models of the economy, or by an inappropriate application

of Frank Ramsey’s benevolent dictator model, or through real business cycle
‘analysis’, or through so-called New Keynesianism. In the last, microeconomic
theories of the reasons for ‘imperfections’ existing in goods and labour markets
are used to derive systemic results which are argued to look Keynes-like. In the
process, the fallacy of composition and Keynes’s stress that the whole is often
more than the sum of the parts, have been removed by assumption from analy-
sis (in the first three approaches) and inadequately tackled, if at all, in the fourth.
Moreover, in the fourth approach, there is the quite unKeynes implication that
the removal of imperfections could make economies function in socially opti-
mum ways. The final irony is that the dominant model that is used in graduate
courses to discuss monetary matters and policy logically cannot find a role for
money and its characteristics within its formal construction, as Colin Rogers in
a number of devastating critical papers has shown us (Rogers 2006).
Of course, there were more than purely intellectual (or even academic scrib-
bling) reasons for what has happened. In the years of the Long Boom (as the
Marxists dubbed it) or Golden Age of Capitalism (more the left-Keynesian de-
scription) from the 1950s to the early 1970s, major social and political as well as
economic events were occurring. Their combined effect was to aid cumulatively
the rise to dominance of the anti-Keynesian intellectual forces itemised above.
There was growing hostility to ‘big government’ and stroppy labour behaviour,
uncannily reminiscent of the events which Kalecki predicted in his remarkable
1943 article, ‘Political aspects of full employment’. There, he analysed the great
differences between, on the one hand, the political economy of getting back to
full employment after a deep slump, and, on the other, the political economy
of sustaining full employment, what I like to call the Kaleckian dilemma. Thus,
Kalecki wrote of the second situation:
the maintenance of full employment would cause social and political
changes which would give a new impetus to the opposition of the busi-
ness leaders [to full employment]. Indeed, under a regime of permanent
full employment, the sack would cease to flag its role as a disciplinary
measure. The social position of the boss would be undermined and
the self-assurance and class-consciousness of the working class would
grow. Strikes for wage increases and improvements in conditions of
work would create political tension … true … profits would be higher
under a regime of full employment than they are on average under
laisser-faire, and even the rise in wage rates resulting from the strong
bargaining power of the workers is less likely to reduce profits than to
increase prices, and thus affect adversely only … rentier interests. But
“discipline in the factories” and “political stability” are more appreci-
ated than profits by the business leaders. Their class instinct tells them
that lasting full employment is unsound from their point of view, and
that unemployment is an integral part of the normal capitalist system.
(Kalecki 1943; C.W. Vol. I 1990: 351, emphasis in original)
4 The Economic and Labour Relations Review

Add on to this the growing unpopularity of the Vietnam War in the USA (espe-
cially when it was realised that it could not be won), Australia and New Zealand
(the only respectable allies of the Americans in this most immoral war, even
more immoral than the recent adventures in Iraq), and in Europe and Asia. The
effects of these social movements were compounded by President Johnson’s
attempt to finance the war without increasing taxes, so that the US economy
tended to overheat even prior to the oil price rise shocks which amplified in-
flationary tendencies. The consequent rise of protest movements and student
revolts all round the world associated with the war and much needed reforms
in the institutions of higher education, together with civil rights and feminist
movements and these other events brought the conservative forces in society
to rally around what were previously thought to be the odd ball approaches of
Friedman, for example.
In addition, as the new wave of globalisation spread, international capital-
ism became more and more determined to increase the potential surpluses
available for national and international accumulation. This desire fed neatly
into support for Monetarist policies, aptly described by the late Tommy Balogh
(1982: 77) as ‘the incomes policy of Karl Marx’. Friedman’s arguments revolved
around the concept of the natural rate of unemployment; he argued that away
from the natural rate prices would either fall or rise cumulatively, reflecting
excess supplies or demands in individual competitive markets. This implied
that control of inflation, for example, was to be implemented by aiming at the
establishment of the natural rate through monetary policy (short sharp shocks)
until it was reached by control of the money supply such that the rate of infla-
tion would now remain constant. This reflected the fact that in the real sector,
the pattern of relative prices in both goods and labour markets were market-
clearing ones (allowing for actual imperfections which created a divergence
from the underlying pure Walrasian system that modelled the economy).
What this really meant, though, was that contractionary policies were em-
ployed to raise levels of unemployment (the reserve army of labour) in order
to make the sack an effective weapon again. This would provide the cowed and
quiescent labour forces associated with the reversal of the cumulative move-
ment of economic, social and political power to labour from capital which had
occurred in the Golden Age of Capitalism, back to capital which could then
create a larger potential surplus for profits and accumulation.
If all this is taken to be the ravings of an unreconstructed Marxist (which I
am not!), let me remind you that it is basically and independently a paraphrase
of arguments in a lecture given by Paul Samuelson at the Bank of Italy in his
ninth decade (Samuelson 1997: 6–7; Harcourt 2006: 127). In comparing the
different experiences of the (then) present day American and European econo-
mies, he stressed ‘two main factors … One: In America we now operate … the
Ruthless Economy. Two: In America we now have a Cowed Labor Force … ’.
What was forgotten (possibly never known) was the existence of a ba-
sic contradiction — to wit, that creating larger potential surpluses by these
measures, i.e., through high sustained unemployment and sluggish aggregate
demand, simultaneously adversely affected the accumulators’ ‘animal spirits’,
The Rise and, Hopefully, the Fall of Economic Neo-Liberalism in Theory and Practice 5

so that in the event the potential surpluses often failed to be realised. If we

examine the performances of many economies in this era, it will be found that,
often for long periods, rates of accumulation were sluggish relatively to those
achieved in the Golden Age of Capitalism.
Moreover, as finance capital came to dominate industrial and commercial
capital, Minsky-type effects emerged. With finance capital out of kilter with
the other two, the inescapable growth cycles of capitalist economies had their
amplitudes enlarged by the impact of Minsky-type effects. The latter arise from
the non-realisation of expected cash flows from investment projects which
are needed to back up the extra financial commitments that financed invest-
ment and which were already written into the liability sides of balance sheets
(Harcourt 2000, 2001). In addition, the cumulative extension of credit to all,
while obviously an individual ‘good’, became more and more a public ‘bad’
at the systemic level as changes in borrowing and lending rates to consum-
ers, combined with wealth effects, served to make the Keynesian consumption
function as unstable and volatile as investment expenditure traditionally was
known to be: hence, the enlarged amplitudes of trade cycles and deeper and
more prolonged slumps.
Accompanying the rise to dominance of finance capital and the emergence
of new sophisticated financial instruments, the workings and effects of which
became increasingly hard to understand, were technical advances that shrank
the historical length of short runs from months or even years to days or even
hours. The steady movement towards an obsession with obtaining maximum
short-term results, regardless of their longer term effects both on the deci-
sion-makers directly concerned and the industries and economies in which
they occurred — that is to say, the rise of what John Hicks (1954, 1983) called
snatching behaviour, built more and more potential sources of instability into
economic systems. Alfred Marshall’s insistence that there are three periods of
equal importance in economic analysis — market, short and long periods — was
increasingly neglected in actual economic behaviour and decision-making,
even if it lingered on, a pale shadow of its former prominence, in academic
teaching and research. Behaviour in more and more important markets — the
foreign exchange markets, the stock exchanges, the housing markets, for ex-
ample — came increasingly to resemble the behaviour of casinos. As Maynard
Keynes reminded us many moons ago: ‘When the capital development of a
country becomes a by-product of the activities of a casino, the job is likely to be
ill-done’ (Keynes 1936; C.W. Vol. VII 1973: 159).
Yet policy advisors and academics alike were still urging us to trust the
workings of ‘freely competitive markets’ and arguing that, overall, governments
should remain in the background. Bubbles emerged in key markets and now, as
we know, the whole box of tricks has been exposed and a major crisis, both fi-
nancial and real, has emerged. Our pre-Keynesian advisors are unable to tell us
either why, or what should be done. Fortunately, common sense has prevailed
in many countries and old-fashioned Keynesian and post-Keynesian policies
are emerging. Whether they are of great enough magnitude to succeed remains,
alas, to be seen. If they do, the ‘hope’ in my title will surely be fulfilled and
6 The Economic and Labour Relations Review

the editors of, and contributors to, The Economic and Labour Relations Review
should surely be praised for their role in the outcome.

Notes
1. See Harcourt (1982: 372–373) for the details of the attack on Lorie’s book.

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