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Full contents
1 What is economics? 21
Louis-Philippe Rochon and Sergio Rossi
Introduction 21
The role of ideology in economics 25
Is economics a science? 28
The use of models and of mathematics 30
Economics and the social sciences 33
What then is economics? 36
Micro- versus macroeconomics 38
A portrait of Adam Smith (1723–90) 41
15 Financialization 319
Gerald A. Epstein
Why are these topics important? 320
What is financialization? 320
How old is financialization? 322
Dimensions of financialization 322
Impacts of financialization 327
Conclusion 331
A portrait of Karl Paul Polanyi (1886–1964) 334
Index 399
The editors would like to thank all the contributors to this book for their
collaboration in preparing this volume to enhance the understanding of eco-
nomic analysis in a pluralistic perspective. They also wish to express their
gratitude to Edward Elgar Publishing for their enthusiastic and professional
support during the development of the book. Finally, they are most grateful
to Amos Pesenti for his excellent research assistance, to Denise Converso–
Grangier for her contribution in preparing the full typescript for the pub-
lication process, and to Dee Compson for her professional efficiency in
copy-editing the whole book.
The first chapter, written by the co-editors of this textbook, explains the
meaning and purpose of economic analysis. In the first section, the authors
present and criticize the mainstream definition of economics, which aims at
the ‘efficient allocation of scarce resources’. This definition includes three
main concepts, each with very specific and powerful meanings in economics,
namely, efficiency, allocation and scarcity. In this view, the main issue to
address thereby is how to allocate a given supply of resources. The first
section also briefly discusses the differences between microeconomics and
macroeconomics, emphasizing how mainstream macroeconomics is cru-
cially built on the key assumption of aggregating individuals’ behaviour, that
is, on microeconomic foundations. Rochon and Rossi also point out that
there is no need for money to exist in mainstream models. Indeed, orthodox
models explaining consumption, investment, and economic growth contain
no money essentially. Money is introduced much later, as part of a discus-
sion about the banking system, as an afterthought, or as an attempt to make
these economic models appear more realistic. This is the reason why the
first chapter offers an alternative interpretation of the scope and contents of
economics.
First, the authors argue that macroeconomics should not be a simple aggre-
gation of individual behaviour and microeconomic magnitudes, that there
are characteristics special to macroeconomics, and that social classes (or
macro-groups) play an important role in determining economic outcomes.
Based on macro-groups, economic dynamics become very important in
explaining consumption, investment, prices and economic growth. Further,
by emphasizing groups, one can ask a different set of questions and cast these
questions within the framework of political economy rather than econom-
ics, as clearly explained in Chapter 2. The first chapter shows thereby that
markets are not free, but governed by laws and institutions that play a central
role in any economic activity. Moreover, in casting this view with regard to
social groups, the importance of power becomes paramount, notably, the
power over the determination of wages, the power over access to credit, and
the power of the state. Ultimately, we live in a money-using economy, so, as
Schumpeter argued, money should be introduced at the beginning of the
discussion of economics (Chapter 3 delves into this subject matter in more
detail). That is why this textbook, in contrast to all other macroeconomics
textbooks, begins with an explanation of money (Chapter 3) and the banking
system and finance (Chapters 4, 5 and 6) after a survey chapter on the history
of economic theories, which is required in order to understand the general
framework of any economic analysis, be it theoretical or policy oriented.
open-minded thinking, that is, what John Maynard Keynes (1926) called
the ‘emancipation of the mind’. This should enable students of the history of
economic thought to distil the most plausible theoretical principles, which
are the grounds on which policy proposals may be eventually made. Indeed,
economic theorizing must be based on the history of economic thinking
to have an informed broader picture of the state of the art. In light of this,
the second section presents two broad groups of theories – economics and
political economy – to bring into the open the fundamental differences in
economic theorizing. In economics, the great problems (value and price,
distribution and employment) are market issues essentially, and money is
neutral. By contrast, the starting point of political economy is the social and
circular process of production: the fundamental prices are the prices of pro-
duction, not market prices; income and wealth distribution are governed by
social forces, and employment by effective demand; money and finance play
an essential role. The third and fourth sections sketch the historical develop-
ment of economics and political economy respectively. Economics starts with
Adam Smith, who conceived of the economy and society as a self-regulating
system. Jean-Baptiste Say (a follower of Adam Smith) claimed therefore that
there can be no unemployment. The great systems of economics were then
created in the course of the Marginalist Revolution (1870–90). Léon Walras
worked out the general equilibrium model; Alfred Marshall the partial equi-
librium approach. Both became constitutive of contemporary mainstream
economics. By contrast, the French surgeon François Quesnay is at the origin
of the political economy line. He considered the flows of goods and money
within the social and circular process of production to produce the net
output at the free disposal of society. As regards production, David Ricardo
worked out the labour value principle and the surplus principle of distribu-
tion. Piero Sraffa revived the classical (Ricardian–Marxian) approach, which
had been submerged by the Marginalist Revolution. John Maynard Keynes
elaborated the principle of effective demand, represented by the multiplier
relation, implying the existence of involuntary unemployment. At the time of
writing, the post-Keynesian and classical–Keynesian followers of Sraffa and
Keynes form, together with Marxists, the core of modern political economy,
representing an alternative to the neoclassical mainstream. The last section
of Chapter 2 discusses the plausibility of these two approaches. The capital-
theory debate emerges thereby as the theoretical watershed between eco-
nomics and political economy.
Sot-Weed Factor, p. 6.