New and Old Foundations of Economic Analysis

1998

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So far as pure theory is concerned, Walras in my opinion is the greatest of all economists. His system of economic equilibrium, uniting as it does, the quality of "revolutionary" creativeness with the quality of classic synthesis, is the only work by an economist that will stand comparison with the achievements of theoretical physics [2].Walras indeed aspired to produce a Newtonian replica in economic thinking when he confessed himself:Very few of us are capable of reading Newton's Philosophiae Naturalis Principia Mathematica or Laplace's Mecanique Celeste: and yet, on the word of competent scientists, we all accept the current description of the universe of astronomical phenomena based on the principle of universal gravitation.Why should the description of the universe of economic phenomena based on the principle of free competition not be accepted in the same way? There is no reason why the proof of the system, once established, may not be taken for granted, nor why the assertions involved may not be used in the study of applied or practical economics [3].Analytically speaking, he was correct. However, the great Walras too lived under the same universal law of human imperfection and missed two important points. Even though he described very well the function of entrepreneurship[4], nevertheless he started the subject with the assumption that "in a state of

Section: Two Different Concepts Of Equilibriummentioning

confidence: 99%

Two concepts of equilibrium, the equation of unified knowledge and two concepts of stability

1998

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“…They all failed to see that such an ideal system could not function properly and efficiently without a suitable institutional and legal framework, or factor "R" on the orientation table, consistent with the natural parameter of the numeraire and pure competition. In this respect, classical heritage remained an unfinished product up to the present day [47].…”

Section: Two Different Concepts Of Stabilitymentioning

confidence: 99%

Prolegomena to any future study in economics and finance as a science

1998

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Part II. The economic science again in a crisis! 1. New times, new problems and the search for new solutions With the appearance of The General Theory of Employment, Interest and Money (1936) by John Maynard Keynes, later Lord Keynes, a new economic world was in the making. The big storm of 1929 called the Great Depression was on its way out.Keynesian new ideas created optimism in the future, i.e. with active government intervention, respectively through macro monetary and fiscal policies, the great social plague of mass unemployment which was dominating at the time seemed to be solved forever. This appeared to be his firm belief and that of those who followed his new ideas. A large part, one might say the majority of the living generation of economists, not only in his own country (Great Britain) but all over the world seemed to be on his side. Such an event in the economic profession was without precedent since François Quesnay with his Tableau Oeconomique (1758) and Adam Smith with his Wealth of Nations (1776). This is how a new version of macroeconomics was born.The economic science by the beginning of the 1930s was in a crisis; more specifically, in an open conflict between classical economics, which was promising automatic stable equilibrium with full employment according to the Say law of the markets in the image of the old laissez-faire version of modern capitalism, and the existing, empirical economic realities dominated by disequilibrium conditions with mass unemployment. In other words, the classical theory of the time said one thing (equilibrium with full employment with no direct government intervention) and the practice (economic history) revealed quite the contrary, that is, disequilibrium, instability.The rising opposition through the critical voice of Keynes and other associates identified the conflict in question very well and offered what was interpreted at the time as the only best alternative to Marxian economics which already conquered the Soviet Union in 1918, namely the new Keynesian macroeconomics promising full employment by following after 1936 the Keynes magnum opus of general theory.The real economic and financial world moved subsequently in the direction envisioned by Keynes. In the fall of 1931 Great Britain abandoned the modern, mixed gold standard and introduced a new monetary system based on paper money and monetized credit or what Keynes earlier in his A Treatise on Money (1930) called "representative money" or "managed currency" as opposed to real money backed by gold, silver or any other suitable commodity, what Walras called "numeraire"-currency when he formulated his law of general equilibrium. Of course, Keynes knew what he was doing. Macro monetary and fiscal policies required by definition nominal and not real money.The devaluation of the US$ by the new Roosevelt administration in the USA, January 1934 and the suspension of internal convertibility in gold moved in the same direction even though not so completely as the UK since the external convertibility of the dollar ...

“…The genius of Newton envisioned here the duality of our physical universe and in fact he appears to be the father of the universal hypothesis of duality which in a more complete form says:Our physical universe as well as human societies and economies are composed of stable (equilibrium) and unstable (disequilibrium) elements, forces, institutions, behavior, values, all arranged in various proportions[19]. …”

Section: Part I In Search Of New Solutionsmentioning

confidence: 99%

Prolegomena to any future study of a great free, just and stable economy and society

1998

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The economic science is again in a crisis and a new solution prolegomena to any future study in economics, finance and other social sciences has just been published by the International Institute of Social Economics in care of the MCB University Press in England. The roots of the major financial and economic problems of our time lie in an open conflict between theory and practice. In the 1930s and before the conflict was between classical theory and given realities. In the 1990s the conflict appears between the now prevailing modern, Keynesian theory and the actual realities. In addition during the twentieth century a great argument developed between the two schools of thought, argument which is not yet settled. In one sentence, the prolegomena tried and was successful to solve the conflict between theory and practice and the big doctrinal dispute of the twentieth century. It was a struggle of research and observation over half a century between 1947 and 1997.