Economics 380 Home Page

Elemental Economics


Lecture Notes

Harry Hillman Chartrand © 2006

Economics 380, USASK, 2005-6






Causes of the Revolution

External Causes

Internal Causes

Its Nature

Its Significance



It is interesting to note that of Blaug’s text of 704 pages, the Keynsian Revolution amounts to 7% or 47 pages (641-688).  By way of comparison, his methodology accounts for 2% or 15 pages (689-704), his Introduction amounts to 1% or 9 pages (1-9); his Classical Economics (including Marx) accounts for 38% or 266 pages (10-276) and his Neo-Classical or Marginalist Economics 52% or 383 pages  (277- 640).   If, as Blaug claims, he is viewing the history of economic thought from the perspective of ‘modern’ analytics it is clear that the bulk of tools and techniques of contemporary analysis emerged from the Marginalist Revolution. 

In a sense this should not be surprising given that Keynesian Economics emerged out of the same intellectual home as the Marginalist Revolution, Alfred Marshall’s King’s College Cambridge.  In fact, Keynes was a student of Marshall and the micro tools and techniques of his student days became fodder for development of the macro revolution.  An arguable example is the k in the Cambridge equation for the demand for money Md = k PY leading to the b in the Keynesian consumption function C = a + bY.  Similarly, the concept of supply and demand curves and their equilibrium is a Neoclassical construct mutated into aggregate supply and demand in the hands of Keynes. 


Causes of the Revolution

What is odd about Blaug’s treatment of the Keynesian Revolution, however, is failure to replicate his schema for the causes of the Marginalist Revolution.  There he proposed four possible causes which can be clustered according to their external or internal origin relative to economics.   This internal/external formula is standard practice in the philosophy and sociology of science. 

Externally he proposed three: (i) the product of philosophical currents; (ii) the product of definite institutional changes in the economy; and, (iii) a counterblast to socialism, particularly to Marxism.  Internally, he proposed the Marginalist Revolution was an autonomous intellectual development within the discipline of economics.

I will now, on Blaug’s behalf, attempt to follow this formulae for the Keynesian Revolution. 


External Causes

1. Competing Ideologies

If, for Blaug, ‘philosophical currents’ and ‘a counterblast to socialism’ at least partially explain the Marginalist Revolution then alternative and competing political economic ideologies on offer at the time may partially explain the Keynesian Revolution.  These ideologies represented both intellectual alternatives to the market system and ‘real world’ praxis in direct and heated competition with the liberal market democracies of the day.   

First with the Russian Revolution of 1917 the Soviet Union arose as a practioner of Marxist not market economics.  Then alternative ideologies began to pop up around the world.  In 1922 Mussolini’ Fascism combining syndicalism and dirigisme with glorification of the Roman Empire took power in Italy.  And the trains ran on time.  In the mid-1920s militarists took control of the Empire of Japan and instituted a campaign for the Asian Co-Prosperity Sphere.  This involved expelling European imperialists from Asia and establishing economic self-sufficiency with no need to trade with the rest of the world, i.e., autarky.  The racial element should not be forgotten.  The Japanese, as the only divine race in Asia, were destined to rule.  Then in 1933, National Socialism (NAZI) under Adolph Hitler assumed power in Germany and began the Drang Nach Osten or 'drive to the east' to establish the economic self-sufficiency of the German people, i.e., autarky.  Also in 1933 Roosevelt’s New Deal began a program of public works and initiated a range of social welfare programs that ran against the Standard Model, e.g., reducing wage flexibility.  In 1936 the fascist forces of Franco defeated the anarchists, communists and other Leftist ideologies including the Republican with his victory in the Spanish Civil War.  With the exception of the Soviet and American experience, it is important to note the racial element in these alternative ideologies.  In many ways the Second World War can justly be called ‘the great war against racism’.  In a sense all were 'Classical' representing the economy as consisting of distinct sectors or classes and the problem being distribution of national wealth amongst them.  Unlike Marxism, however, these sectors were racially rather than functionally defined.  With but the American exception none favoured the Neoclassical market model of economics.  A savior of the market was needed to play out 'the great man' theory of history.  Enter John Maynard Keynes and his General Theory, stage right.


2. Institutional Change

Blaug minimizes institutional change as a factor in the Marginalist Revolution.  Arguably, however, it was a significant factor in the Keynsian Revolution. 

 - anti-trust as first intervention by government including repeal of the Conspiracy Act

- WWI & lessons of  ‘total war’, demobilization, uneven recovery, women

- Berle, A.A. and Gardiner C. M., The Modern Corporation and Private Property, New York: McMillan, NYC, 1932.

While a satisfactory theory of capital never emerged from the Classical School of Adam Smith or the Neoclassical School, the idea of a single owner of capital directing production was, and remains, an elementary assumption of the economic theory of the firm.  Growth and development of the limited liability corporation, however, spread capital ownership wider and wider (contra Marx) to embrace more and more ‘shareholder’ owners.  This, in turn, led to a separation of ownership and control first formally noted by Berle & Means (1932) with the concomitant emergence of a new class of labour called ‘management’.  This new class exercised the prerogatives of ownership as hired agents (employees) of shareholders.  That the ‘agency problem’ in economics has not been solved is evident in the recent wave of corporate scandals, e.g., Anderson, Enron, Tycho, Worldcom, et al.

- separation of control and ownership leading to Herbert Simon's ‘satisficing’ rather than maximizing behaviour and the agency problem


Labour & the Technostructure

If the definition of capital is unresolved, the economic definition of labour is problematic in the extreme.  In conventional terms, labour refers to the physical and mental effort of a worker in the production of goods & services.  Labour, unlike capital, has been subject to definitional reduction, not expansion.  It has been subject to capitalization rather than humanization as a factor of production.  Thus education and training add to the stock of ‘human capital’, something ideologically alienated from labour and subject to managerial control as a corporate or national asset.  Similarly, entrepreneurship and management have become detached from labour even though separation of ownership from control – public or private - makes the manager an employee or agent, not a principal or owner.  In effect, labour becomes warm hot bodies doing what it is told.  Effort is organized according to a division and specialization of labour (brawn) determined by a specialized class of employee called management (brains).

But why should one class of labour ‘work’ and another ‘manage’?  This was the subject of Richard Bendix’s historically exhaustive Work and Authority in Industry: Ideologies of Management in the Course of Industrialization (1956; 1976; 2001).  Bendix traces the conceptual history of modern management back to feudal times.  He finds, in effect, a theory of positive thinking: managers have a positive self-image and can defer gratification while workers do not and cannot.  Bendix thereby captures perhaps the last embers of the ‘Iron Law of Wages’.  Classical economics accepted, with relative equanimity, the starvation of labour who must then accept lower real wages or who, alternatively, with higher real wages simply bred increasing the labour supply and thereby lowering wages through competition.  Full employment, under the Classical model, was assured on the backs of labour, or what Marx called “the surplus army of the unemployed”

John Kenneth Galbraith in his New Industrial State (1967) went further and described the modern corporation as governed by a self-replicating technostructure of managers produced by and selectively chosen from graduates of so-called ‘B’ or business schools.  It is they who direct workers on behalf of an ever increasing and diffuse pool of shareholder-owners.  Galbraith also explored the relationship between large corporations and a newly emerging class of labour - creative talent, specifically artists (Economics & The Public Purpose, 1973).  While the classless genius emerged with the Renaissance’s artist/engineer/humanist/scientist, by definition, it is exceptional and has not, historically, constituted a distinct class of labour.  In the hands of Reich (1990) and Drucker (1998), a new class of creative workers has emerged called, respectively, ‘symbolic’ or ‘knowledge’ workers.  In fact, there are three distinct classes of knowledge workers: productive, managerial and entrepreneurial.

- volitional variables




Internal Causes

1. An autonomous intellectual development within the discipline of economics

Neo-Classical is the name given to the Marginalist School by Thorstein Veblen, an American.  Keynes, British, wove together his so-called ‘straw man’ out of disparate aggregate strands of:

  •  ‘micro-economics’, i.e., the Marshallian or Standard Model, theory of money plus general equilibrium analysis; and, 

  • macro- themes and heuristics of the Classical School of Smith, Ricardo, Malthus and Mill, e.g., Say's Law.  

In this sense it is ‘Classical’.   It in fact did not exist until Keynes put it together.  Keynes’ own model lacks such a micro- foundation. The fact that a complete macroeconomic model of the economy did not exist before Keynes is a primary internal cause of its creation: Nature abhors a vacuum. 

Another is the empirical facts about the changed nature of the economy - large-scale business enterprise, organized labour, investment principally emerging from household savings and a deepening politically and socially disruptive depression.  Even with the multiple discovery of equilibrium solutions for imperfect competition under monopoly and monopolistic competition by Joan Robinson and Edward Chamberlin in 1933, the Neo-Classical Model was incapable of finding equilibrium for an economy dominated by oligopolistic firms.  This inadequacy gave birth not just to Keynes' General Theory but also to game theory which is a whole other story. 

Yet another internal reason was recognition of the implications of increasing returns, product/process innovation and external economies which made Neo-Classical equilibrium problematic at best.  While arguably suggested by Marshall, it was Allyn Young in 1928 who most fully expressed its implications:

No analysis of the forces making for economic equilibrium, forces which we might say are tangential at any moment of time, will serve to illumine this field, for movements away from equilibrium, departures from previous trends, are characteristic of it.  Not much is to be gained by probing into it to see how increasing returns show themselves in the costs of individual firms and in the prices at which they offer their products. (Young 1928, 528)



Its Nature



Its Significance