Tuesday, October 7, 2014

Shackle on the Emergence of Uncertainty and Expectations in Modern Economics

From G. L. S. Shackle’s fascinating book The Years of High Theory: Invention and Tradition in Economic Thought 1926–1939 (1967):
“At the opening of the 1930s economic theory still rested on the assumption of a basically orderly and tranquil world. At their end it had come to terms with the restless anarchy and disorder of the world of fact. Partly this transformation was effected by the brutal force of events: by a slump without parallel and the unnerving spectacle of the rise of Nazism in a world cheated of the hope of peace. But partly it was the work of a mere handful of great theoreticians. One thing above all divided the new theory from the old: the discarding of the assumption (which had often been quite tacit) of universal perfect knowledge. What sense did it make to assume perfect knowledge in a world where every morning’s newspaper was opened in fear and scanned with foreboding? But the ferment had been working in the world of theory from the beginning of the 1920s. Frank Knight’s Risk Uncertainty and Profit of 1921 puts entrepreneurship in the forefront of a treatise on value theory which largely sets forth the old orthodoxy. But perhaps its title was a portent. It was in Sweden that expectation was first taken seriously as a prime mover in the economic process. (Marshall, as always, was with the angels, but he did not blow this particular trumpet very loud.) Erik Lindahl and, more incisively and with one brilliant and epoch-marking stroke, Gunnar Myrdal, developed the first ‘economics of expectation’. Myrdal’s essay, published in Swedish in 1931, in German in 1933, and in English only in 1939, would have served very well as the launching-pad for a theory of general output and employment, had the General Theory never been written. 1937 was the year of intensive Keynesian critical debate. In February Keynes himself declared in the Quarterly Journal of Economics that the General Theory was concerned with the consequences of our modes of coping with, or of concealing from our conscious selves, our ignorance of the future. Hugh Townshend, his intellectually most radical interpreter, simultaneously expressed the matter (in the Economic Journal for March) in terms, if anything, even more uncompromising. Uncertainty was the new strand placed gleamingly in the skein of economic ideas in the 1930s.” (Shackle 1967: 5–6).
Myrdal’s “essay” that Shackle refers to here was “Om penningteoretisk jämvikt. En studie över den ‘normala räntan’ i Wicksells penninglära” [“On Monetary Equilibrium. A Study of the ‘Normal Rate of Interest’ in Wicksell’s Monetary Theory”] (Ekonomisk Tidskrift 33 [1931]: 191–302), which was translated into English as Monetary Equilibrium (London, 1939). Myrdal had, according to Shackle, opened the debate about expectations before Keynes.

Later Shackle examines the significance of Gunnar Myrdal’s work Monetary Equilibrium (1931, English trans. 1939):
“In Monetary Equilibrium we have chapter IV. That chapter and its sequel are the battlefield where the decisive action occurs. We have examined their contents and effect in detail. But after them come passages of high interest, confirming and extending the conclusion that, had the General Theory never been written, Myrdal’s work would eventually have supplied almost the same theory.” (Shackle 1967: 124).
I am not sure whether this is a fair assessment, but it is high praise indeed coming from Shackle.

In Monetary Equilibrium, Myrdal seems to have criticised Wicksell’s concept of the “natural rate” and other aspects of the monetary equilibrium approach (Skaggs 1997: 473). Myrdal later advocated countercyclical fiscal policy and even had some understanding of the multiplier process (Skaggs 1997: 474).

Philip Pilkington has a fascinating post here analysing Myrdal’s monetary equilibrium theory:
Philip Pilkington, “Gunnar Myrdal’s Monetary Equilibrium Theory: A Summarized Version,” Fixing the Economists, August 12, 2013.
Also, there is another post here on Myrdal and the General Theory:
Philip Pilkington, Gunnar Myrdal’s Prescient Criticisms of Keynes’ General Theory,” Fixing the Economists, August 10, 2013.
Myrdal, Gunnar. 1931. “Om penningteoretisk jämvikt. En studie över den ‘normala räntan’ i Wicksells penninglära,” Ekonomisk Tidskrift 33: 191–302.

Myrdal, Gunnar. 1939 [1931]. Monetary Equilibrium. W. Hodge & Company, London.

Shackle, G. L. S. 1967. The Years of High Theory: Invention and Tradition in Economic Thought 1926–1939. Cambridge University Press, Cambridge.

Skaggs, Neil T. 1997. “Myrdal, Gunnar (1898–1987),” in D. Glasner and T. F. Cooley (eds). Business Cycles and Depressions: An Encyclopedia. Garland Pub., New York. 473–474.


  1. When I first examined Myrdal's theory I thought that it held some resemblance to the New Keynesian theory. I now think that I was entirely wrong on this and regret writing it. I also noted that he did not take sufficient account of the financial and credit system. I still think that this might be valid. He may well not have recognised liquidity preference and other special conditions (debt deflation etc) as well as Keynes. All in all, I'm with Shackle. More so than Kalecki I think that Myrdal was the non-English Keynes.

    Apart from the comments I regret my summary still works if you're interested:


    1. Thanks for the link to your post - it's fascinating.

      On this point:

      "The first condition is that the price of new capital goods, c2, should be equal to the price of production of these goods, r2. Or, put somewhat differently: that entrepreneurs should not be able to make additional profits by taking advantage of the spread between the price of new capital goods and the price of production of these goods. "

      Does this mean there is no actual profit in a state of monetary equilibrium?

    2. Also, added a link to your post.


    3. LK, yes. It is the long-run assumption of all marginalist models: profits will be competed away and the return on capital will fall in line with the interest rate. Thus, as Robinson never tired of pointing out, the return on capital is not profits ala Marx/Kalecki/Keynes but rather the 'reward for waiting/saving', i.e. the interest rate.

      From time to time marginalists now talk about "normal profits" but I have never thought the concept a clear one.


    4. From all my reading of the Post Keynesian theory of the firm and price theory, this idea seems bizarre.

      So in a strict monetary equilibrium:

      (1) owners of capital earn no profit, since the only "return" over the cost of production is equal to the interest rate, which they have to pay to the banks/creditors of money?

      If the owners of capital get no return, why do they invest at all?

      (2) in a monetary equilibrium, is the long-run return on capital as equal to the interest rate the same thing as the marginal productivity of capital?

    5. Yes, it is very strange. And it is quite explicitly stated in even intro textbooks. Hal Varian's microeconomics text is one of the bestsellers. In it he writes:

      "...the only reasonable long-run level of profits for a competitive firm that has constant returns to scale at all levels of output is a zero level of profits" (p355)

      To answer your questions.

      (1) Typically marginalists assume that there is no capitalist class and nor are there rentiers. So, the owners of capital are households. Their holdings of capital are savings and the return on capital is the rate of interest. If you pressed them on it they might say that there are CEOs that control the firms nd act as intermediaries for the savers. But they would simply be getting paid their wage in line with their marginal product and hence this was just part of the firms' wage/salary bill.

      (2) Yup. Do you just smell those old capital debates bubbling up? ;-)

      If you're interested in this I recommend the following paper:
      Aslanbeigui, N. & Naples, M. I. (1996). ‘What Does Determine the Profit Rate? The Neoclassical Theories Presented in Introductory Textbooks’. Cambridge Journal of Economics. Vol. 20. No. 1. Pp53-71.

  2. Oh, and I knew you'd like Shackle's work. That is the first book I read by him. It is typically fantastic.

  3. Very interesting LK, thank you.Yes Gunnar Myrdal-Monetary Equilibrium is infact a more or less a translation to english of his doctoral thesis from 1927, written under the guidance of Gustav Cassel,titled "Prisbildningsproblemet och föränderligheten". "(The pricing problem and mutability." ) and yes the idea to use fiscal policy adjusting national budgets to slow or speed an economy was already in Myrdal´s 1927 dissertation.It´s very much the same thoughts that Keynes developt in The GT.The disussions among the Swedish economists at that time was much the same as Keynes and his circle dealed with.Worth noting is that Kalecki went to Sweden,for a short time before he arrived to Great Britan and had Myrdal as mentor.Here is some papers that deal with the questions you wrote about in this blogpost and maybee is of some interest you for you.
    Myrdal's Analysis of Monetary Equilibrium
    G. L. S. Shackle
    No. 7 (Mar., 1945),
    Adrián de León-Arias.
    CUCEA-Universidad de Guadalajara (Mexico).
    Rules from Myrdal’s Monetary Equilibrium.
    Why Should We Read Myrdal as complement of Wicksell?
    Myrdal, growth processes and
    equilibrium theories Carlo Panico and Maria Olivella Rizza
    Claes Henrik Siver -Monetary Equilibrium
    Stockholm University
    On Prices in Myrdal’s Monetary Theory
    Alexander Tobon-History of Economic Review, 43, Winter, 2006, p. 88-100

    Claude Gnos

    1. Thanks for the links - very interesting.

    2. By the way LK,i just found this on youtube
      Gunnar Myrdal lecturing at UCLA 5/4/1966

    3. Thanks for that last link to the Gnos paper.