The Second Crisis of Economic Theory

An excerpt from Joan Robinson's 1971 Richard T. Ely keynote address to the American Economic Association. Somehow it seems as relevant today.

"There is no such thing as a normal period of history. Normality is a fiction of economic textbooks. An economist sets up a model which is specified in such a way as to have a normal state. He takes a lot of trouble to prove the existence of normality in his model. The fact that evidently the world does exist is claimed as a strong point for the model. But the world does not exist in a state of normality. If the world of the nineteenth century had been normal, 1914 would not have happened.

"At the time, however, in the postwar scene, normality lay in the past. As far as the economists were concerned, they did not really know very much about that world. They knew what was in their books.

"In their books, a private enterprise economy tends to equilibrium and not only to equilibrium--to an optimum position. Trouble was often caused by politicians who were shortsighted and under the sway of particular interests. If only they would establish free trade, restore the gold standard, keep budgets balanced, and leave the free play of the market forces to establish equilibrium, all would be for the best in the best of all possible worlds. Of course, there were footnotes making cautious reservations. Indeed, in the higher reaches of the profession there was something of the atmosphere of the augurs touching their noses behind the altar. Amongst themselves, they admitted it was not really like that. But their pupils took it all literally. They formed an official opinion deeply influenced by the conception of equilibrium which could be relied upon to establish itself provided that no one tried to interfere.

"The doctrine that there is a natural tendency to maintain equilibrium with full employment could not survive the experience of the complete collapse of the market economy in the thirties.

"Out of this crisis emerged what has become known as the Keynesian revolution. After the war, Keynes became orthodox in his turn. Unfortunately, the Keynesian orthodoxy, as it became established, left out the point. This is not the second crisis. This is still part of the first crisis.

"Consider what was the point of the Keynesian revolution on the plane of theory and on the plane of policy. On the plane of theory, the main point of the General Theory was to break out of the cocoon of equilibrium and consider the nature of life lived in time--the difference between yesterday and tomorrow. Here and now, the past is irrevocable and the future is unknown.

"This was too great a shock. Orthodoxy managed to wind it up in a cocoon again. Keynes had broken down the compartments of "real" and "monetary" theory. He showed that money is a necessary feature of an economy in which the future is uncertain and he showed what part monetary and financial institutions play in the functioning of the "real" economy. Now the compartments have been restored in the division between micro and macro theory."