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Wobbly Economics – Part I

Why Frederic S Lee was the greatest economist you’ve never heard of

People really hate economists. It’s something which surprises and puzzles those in the discipline, whenever they deign to notice. Even then I don’t think they fully understand that it’s a ticking bomb. When it explodes, it will be with a force which leaves little behind after the fires blaze out. 

The problem isn’t just the failings of individual economists, however common these may be. It’s bigger and deeper than that: economics itself is terminally diseased. On some level most educated people outside the profession eventually realize this. But only when you survey the whole past, present, and cutting-edge of this outrageously prestigious field of study can you begin to clearly articulate, first in incredulous murmurs and then with increasingly loud shouts of alarm, a series of observations which add up to a terrifying conclusion: in this supposed science of the economy, at its very heart and to its earliest roots, something has gone fundamentally wrong.

Pondering the popular hatred of economics, the economist Thomas Sowell insisted in a 2002 newspaper column that, actually, no, it’s the children who are wrong. “One of the many reasons why economists are unpopular,” Sowell writes, “is that they keep reminding people that things have costs, that there is no free lunch. People already know that—but they like to forget it when there is something they have their hearts set on.” He wastes no time in listing the trivial fixations of these bleeding hearts: “access to health care for all,” “clean air,” and “saving the environment.” In his characteristically brusque prose, Sowell argues that people hate economics because it’s a dismal science of inconvenient truths, shattering people’s delusions and putting them in touch with what’s actually possible. Sure, it would be nice if these things could happen. But look at them through the little circular wire-framed glasses of economics, and you’ll find they’re not only too expensive but also incoherent as demands.1Thomas Sowell, “Why Economists Are Not Popular” (2002), collected in Ever Wonder Why?: and Other Controversial Essays (2014).

One can always find economists doing this—writing op-ed columns full of transparently false2Each substantive point Sowell makes in his editorial is demonstrably wrong. He says socialized public health services like those in Europe result in skyrocketing patient costs and delayed service, whereas nearly every study (to take one recent example, the Commonwealth Fund’s 2019 analysis) shows that the US spends over twice the average OECD country while having abysmal health outcomes for an industrialized country. He argues that stringent government air quality standards are arbitrary and rooted in public hysteria, since “science is becoming capable of detecting ever more minute traces of impurities with ever more insignificant consequences,” causing politicians to demand far purer air at unnecessary expense; whereas in fact the American Psychological Association has noted that air pollution at the sort of levels that still exist after decades of regulation (especially in working-class areas) can not only increase the risk of heart and lung disease but also impair cognitive development and increase rates of serious depression (Kiersten Weir, “Smog in Our Brains,” Monitor on Psychology, July/August 2012). He argues that prices emerge from “people…bidding against one another for the same resources” – presumably in a Walrasian auction – and that such prices still exist invisibly when public goods are provisioned for free, such that “even when you don’t realize that you are bidding against other people, you are” and “lunches don’t get free just because you don’t see the prices on the menu”; instead, as we’ll see later in this essay, no such bidding occurs even in private sector prices (much less imaginary ones in free public services) because all prices are administered by the firm or agency setting them and there is no lawlike relationship between supply-and-demand and prices, depriving many of his examples of any empirical basis. Finally, the link that threads all his arguments together is a spendthrift assumption that the government must tax or borrow to spend and thus any increase to the deficit is too “expensive” and will “bankrupt” the state, whereas overwhelming historical evidence points to the fact that money is spent or loaned into existence by governments and banks, circulates, and is received back, with the only real limits on its issuance being biophysical ones unrelated to the absolute number of currency units in existence – see John Michael Colon & Steve Man, “The History of Chartalism” Part I and Part II in Strange Matters Issue One (Summer 2022). arguments for why common-sense policies and courses of action are (“well, actually ”) wrong or impossible. When you Google the economists themselves you’ll invariably find their CVs are neatly split down the middle: half math-heavy “research” papers in academic journals that are impenetrable to the uninitiated; half newspaper columns such as this one defending sweatshops, austerity, and the right of the rich to make everything their property and do with it as they please. 

Often it reaches the point of self-parody, especially when the economist in question lacks an editor. There is, for example, a branch of mainstream economics that’s lately become interested in climate questions (the ecological crisis having long ago become unignorable). But its central figures, people such as William Nordhaus, aren’t interested in engaging with actual climate science. Instead they busy themselves writing articles that, behind their equations and dense jargon, make a simple argument: the direct impacts of rising temperatures will mostly affect agriculture, and agriculture is a tiny and shrinking part of global GDP, so the effects of climate change on the economy are being severely overestimated by “alarmists’’ outside of economics. Somehow, Nordhaus and his acolytes are the experts typically consulted to write the economic forecast sections of IPCC reports, which is why these are so much more optimistic than the parts written by actual scientists. In 2018, this sort of work even won Nordhaus a Nobel Prize!3Well, a fake Nobel anyway. One of the more amusing scandals of the economics profession is that their so-called Nobel Prize has nothing to do with the prizes given out by the actual Nobel Foundation since 1901 to commemorate globally important contributions to Physics, Chemistry, Medicine, Literature, and Peace. Rather, the so-called “Nobel Prize in Economics” is actually the “Nobel Memorial Prize in Economic Sciences,” a copycat prize established in 1969 by the Swedish central bank. As the historian of economic thought Philip Mirowski discovered in his research, which he recounts in a 2011 interview with the Institute for New Economic Thinking (“Why Is There a Nobel Memorial Prize in Economics?” on YouTube, 17 August 2011), this fraudulent award was largely established for political reasons: to increase the veneer of the discipline by associating it with the hard sciences, to promote the perspective of neoclassical economics outside the US (it was not the dominant paradigm at the time in European countries; awarding “Nobels” more or less only to neoclassicals helped change that), and to help the clique then in control of the central bank to push for the pro-business depoliticization of their institution (or “central bank independence,” as it’s called in the economics lingo). When such pretty theories are being published, edited, and praised in the business press, all in the private language of technocratic experts, it can even sound halfway convincing. The true derangement of their views only becomes fully apparent when they speak off the cuff, as the economist Richard Tol did recently on Twitter. When asked in 2019 about what to do in the worst-case warming scenarios, Tol gave a curious reply. “A world that is 10K [sic] would not mean that the wet-bulb temperature is over 35 degrees Celsius everywhere all the time,” he notes. How would we adapt? “You can move indoors and turn on the airco.” Elsewhere he clarified: “We’d move indoors, much like the Saudis have.” The prominent climate journalist George Monbiot wrote of these statements: “This, from a professor of economics, looks like humanity’s epitaph. And I mean humanity in both senses of the word.”4The central idea of the Nordhaus school is trivially wrong because, among many other problems, it treats industries and their outputs as being distinct rather than fundamentally interdependent as they are in the real world. Or, to put it in everyday terms: the reason a blow to agriculture is a blow to all other industries is because the food products grown in agriculture are either ingredients which other industries use to make their end products, or food that workers in those industries need to eat to be able to go to work. The reason we can’t just shrug at higher temperatures and “move indoors, much as the Saudis have” is because air conditioning requires energy whose source is the very fossil fuels emitting the carbon that’s heating up the world so much in the first place, eventually beyond the point where more producing air conditioning will be a viable option. As we’ll learn from Fred Lee later in this essay, this turns out to be a really revealing error: neoclassical economics sees the economy as a bunch of independent agents buying and selling things to their advantage in exchange transactions. The real world is actually made up of interdependent productive processes forming supply chains, where the output of one industry is the input some other industry uses to make their output, all forming a circuit which is the going economy reproducing itself over time. Beyond this fundamental error, which gets to the core fraudulence of neoclassical economics itself as a science, there are a number of other problems with the Nordhaus approach, from a conflation of income with biophysical output to the outright fabrication of “empirical” data. Heterodox economists have made mincemeat of these guys. For a relatively readable approach to these issues, see Blair Fix’s excellent article “Can The World Get Along Without Natural Resources?” (2020) on Economics From The Top Down. For a more technical but definitive takedown of Nordhaus et al, see Steve Keen, “The appallingly bad neoclassical economics of climate change,” Globalizations (2020). 

But it isn’t just essayists like Monbiot or myself who express incredulity and rage at the scribbling of the economists. When you really start digging on the web about this stuff, it will quickly become clear that—rather confusingly—some of the most violent critics of the economic profession are… other economists. (Bear with me, this will all make sense in a moment.) James Galbraith, for example, wrote this in 2001 for the American Prospect about his own profession:

Leading active members of today’s economics profession, the generation presently in their 40s and 50s [now in their 60s and 70s], have joined together into a kind of politburo for correct economic thinking. As a general rule—as one might expect from a gentleman’s club—this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen. They offer a “rape is like the weather” fatalism about an “inevitable” problem (pay inequality) that then starts to recede. They oppose the most basic, decent, and sensible reforms, while offering placebos instead. They are always surprised when something untoward (like a recession) actually occurs.5James K. Galbraith, “How the Economists Got It Wrong,” The American Prospect (19 December 2001).

Lest we mistake this for an outdated critique of a field long since reformed, here’s the economist JW Mason writing in Evonomics in 2016:

Economics is not the study of the economy. Economics is just what economists do. Economic theory is essentially a closed formal system; it’s a historical accident that there is some overlap between its technical vocabulary and the language used to describe concrete economic phenomena. Economics the discipline is to the economy, the sphere of social reality, as chess theory is to medieval history: The statement, say, that “queens are most effective when supported by strong bishops” might be reasonable in both domains, but studying its application in the one case will not help at all in applying it in in the other…Or to steal a line from my friend Suresh, the best way to think about what most economists do is as a kind of constrained-maximization poetry. It makes no more sense to ask “is it true” than of a haiku.66. J.W. Mason, “When We Turn to Concrete Economic Questions, There Isn’t Really a ‘Mainstream’ at All,” Evonomics (17 July 2016).

The discrepancy arises from a massive split within the field itself. All the people I’ve discussed above will be called “economists’’ on their resume; but their methods and worldviews are almost totally incommensurable. Sowell, Nordhaus, and Tol on the one hand are part of the orthodoxy that controls the commanding heights of the discipline—the top-rated departments, the major journals—and admits little to no criticism of itself. Galbraith and Mason are part of the heterodoxy that makes due in its own marginal departments and journals, launching eloquent broadsides against the establishment, dissecting its arguments and methods from first principles, and creating useful alternative tools. They’re then totally ignored by all but a subset of the activist Left. 

Yet today more than ever, there’s a widespread understanding among academics, journalists and the public that the dominant paradigms in economics are a failure. This discipline purports to be a science whose results, however dismal or cheery, will tell us what’s possible and what’s not; in practice, year to year, it seems merely to produce whatever line justifies the policies of whoever happens to be in charge. It creates elaborate and sophisticated models of what it calls reality, claiming to take into account not only the norm but predictable deviations from it; yet these models, when applied to any particular situation or material question, produce results so nonsensical and useless that, to train anybody who’s job it is to actually do anything, whole other disciplines with their own models of the same entities need to be invented.7John Kenneth Galbraith (father of that fellow James Galbraith whom I cited above) once infamously said, “The only function of economic forecasting is to make astrology look respectable.” Complaints from capitalists about how some of the most important models in mainstream economics are literally incapable of successfully predicting economic developments (and therefore making them any money) abound in the business press—for one recent example among possibly hundreds, see “A mean feat,” The Economist (9 January 2016). But of course capitalists do need to train cadres of experts who actually understand how the economy works well enough to plan it, so they can hire these as managers for their firms. The Marxian economist Richard Wolff has often made the point that this is why business schools exist: parallel departments whose object of study is exactly the same as that of economics, but whose models and frameworks tend to be more empirical, realistic, and practically useful than anything to be found in the latter. As he once put it:

Here’s what I discovered: the job of economics, to be blunt but honest, is to rationalize, justify, and celebrate the system; to develop abstract theories of how economics works to make it all look like it’s a stable equilibrium that meets people’s needs in an optimal way. (These kinds of words are used.) But that’s useless to people who want to learn how to run a business, because it’s a fantasy—so they’re shunted someplace else. If you want to learn about marketing or promotion or advertising or administration or personnel, go over there! Those people teach you how the economy actually works, and how you’ll have to make decisions if you’re gonna run a business. Over there [in economics], you learn about how beautiful it all is, when you think abstractly about its basic principles.

See “Richard Wolff: Economic Ed vs Business School” on YouTube (21 August 2014). Indeed, as we’ll see, one of the many fields of research grounded in real-world evidence that Fred Lee drew upon to refute mainstream microeconomics was precisely this business school literature.
Its credentials can still get you a job in the Beltway, but its reputation is in tatters; however many economists retain key positions of influence, they’re still the laughingstock of my generation’s best and brightest minds. Above all, economics fails the most crucial sniff test: in a golden age of autodidacticism, a new century of great crises, when more and more people are hungering openly for a framework by which to understand our perilous world, the imagination of our organic internet intellectuals is being captured by philosophy, by anthropology, by history, by ecology—but in all the richest and most vibrant emerging communities for discussing the great questions of our time, economics is present only as the punching bag it has deservedly become. 

We will explore at length why economics is in such a sorry state. For now, it suffices to say that the field is at a crossroads. As social crises have escalated in the past fifteen years, fewer and fewer people have been buying what the Sowells, Nordhauses, and Tols of the world are selling. But for all the vigorous dissent and criticism of the heterodox schools, they remain largely divided and, what’s worse, mostly negative in their approach. A real, viable alternative to the discredited economic orthodoxy is still struggling to be born.8For an accessible overview of some, but hardly all, of the problems with mainstream economics in the wake of recent history, see David Graeber, “Against Economics,” New York Review of Books (5 December 2019).

Enter Fred Lee, Stage Left

In the twenty-first century, realizing that economics is totally fucked is a rite of passage for every serious intellectual. It’s more or less a precondition for doing anything actually interesting in the social sciences. But after a certain point, it’s not enough to just bash this politburo, boys’ club, or priesthood and its dogmas. To do so is merely to define yourself in opposition to the enemy. 

What we need is an actual science of the economy, one which we presently lack. Without it we will be unable to do the kind of planning which is necessary in order to establish economic democracy, build up new industries, achieve full employment, and complete a green transition. Economics clearly has dropped the ball. Who will pick it up? And how do you avoid making the same mistakes?

Many highly intelligent people have thought hard for a long time about these problems. Conventional wisdom among the anti-economists says we’ve still made little headway. But I believe the germ of this new science of the economy now exists. For the past several decades, a framework has slowly developed that really does have the power to describe, predict, and explain the growth and interdependency of industry, finance, and international trade—enough, perhaps, to help us do the kind of planning we need. Right now it’s only that, a seed; much remains to be done, so as to build it out or to correct it with ideas from other disciplines or practical experience; and only a few people know about this work, while even fewer understand its significance. But I’ve become convinced that this new paradigm contains within itself the entire logic of our missing alternative to mainstream economics—that it is the acorn which will grow into the oak tree.

Lee’s accomplishments 

The vigorous beating heart of this research programme was an obscure, recently deceased professor of economics at the University of Missouri, Kansas-City (UMKC): a revolutionary in both politics and economic theory; an anarcho-syndicalist who helped keep the Industrial Workers of the World (IWW) alive through the height of neoliberalism; a world-traveler with a mischievous streak; a general of the dissident faction in the long campaign against economic orthodoxy; a bookish and unassuming man with a ferocious inner spirit, who quietly and with very few resources undertook an inquiry into philosophy, history, and political economy whose results may one day place his name beside those of Steuart, Quesnay, List, Marx, Veblen, Leontief, and Keynes as one of the most important thinkers in the history of economic thought. He was called Frederic S. Lee, and this essay is the story of his life and work.

Fred Lee was born November 24, 1949 to a middle-class family in Nyack, New York. He worked diligently and fastidiously as an economist of the heterodox schools throughout the latter half of the twentieth century and the first decades of this one, knee-deep in research into obscure subjects and little known to the public or the orthodox economists. But among the heterodoxy, things were quite different. By his death in 2014, Lee had become a leading organizer and something of an icon among those interested in creating alternative economic theories. A tireless institution-builder, Lee is known within his field for establishing and heading the Heterodox Economics Newsletter, editing the American Journal of Economics and Sociology, founding the UK’s Association for Heterodox Economics (AHE), organizing enthusiastically within the Union for Radical Political Economics (URPE), and planning seemingly endless conferences, seminars, and conventions that brought together an international community of heterodox economists from across various ideological and theoretical divides. As we’ll see, Lee was motivated to spend so much of his time doing this administrative and organizational work by his theories of social reproduction—all this, he felt, was the economic basis without which the production of real economic knowledge simply couldn’t continue. It won him the undying loyalty of many of the grad students and young professors whose lives he touched—and who mourned his early death at age 64.

But more important than Lee’s institutional legacy—and less widely understood—is the cluster of interlocking theories he developed, which may hold the key to developing a viable and complete alternative to mainstream economics. To be clear, Lee didn’t invent most or perhaps any of it. The theoretical edifice of his life’s work is built upon foundations assembled piecemeal by decades’, even centuries’ worth of other thinkers, not only within economics but in the philosophy of science, in sociology, in history, in anthropology, even in industry and business itself. 

Instead, Lee’s genius was as a synthesizer. He realized not only the importance of but the interconnections between the many subjects that he researched, allowing him slowly over the course of decades to create an overarching system that tied them together. 

He began with a thorough reconstruction of the history of economics—the complete history, involving both the mainstream and heterodox schools, and how the former purged the latter from academia in the middle of the twentieth century (a research programme later summarized in his A History of Heterodox Economics: Challenging the Mainstream in the Twentieth Century [2009]). In the process, he thought through the most profound methodological questions emerging in the philosophy of science: how knowledge is really constructed and grounded in observation, how one paradigm gives way to another, and what it takes to avoid falling into dogmatism. 

From there Lee proceeded to a direct attack upon the economic orthodoxy’s most foundational idea: the price mechanism linking supply and demand to the prices that supposedly then determine the allocation of resources (Post-Keynesian Price Theory [1999]). By digging up and connecting the dots between an overwhelming body of evidence gathered by researchers over decades from quite divergent walks of life and political ideologies, Lee identified several compatible theories—most importantly the theory of administered prices and the theory of oligopolistic competition—which together formed the basis for a completely different understanding of prices, one that was mutually exclusive from (and made better predictions than) traditional microeconomics. 

Meanwhile, Lee began to see common threads between the disparate heterodox schools. He developed a language for the shared ideas that set them apart from (and made them more useful than) the mainstream theory: what he called the surplus approach, the going economy, and the determination of production by effective demand. In his final work, completed at the end of his life (Microeconomic Theory: A Heterodox Approach [2018]), this culminated in his redefinition of economics as the science of the social provisioning process—a model of the economy as a whole which treats it as a series of interlinked and interdependent supply chains and financial flows, the purpose of which is to produce the goods and services that it itself consumes in order to reproduce itself over time.9Part I deals only with A History of Heterodox Economics: Challenging the Mainstream in the Twentieth Century (henceforth, the History) and Post-Keynesian Price Theory (henceforth, PKPT). Part II, which is forthcoming, will discuss Microeconomic Theory: A Heterodox Approach as well as Lee’s unpublished lectures and occasional political writings. Both parts cover his life as well as his work, in more or less chronological order.

Lee’s theories aren’t just logical deductions from axioms produced in an armchair. They’re quantitative models grounded in a huge body of qualitative research built up out of empirical observations and case studies. In other words, when the equations finally do show up in his work, they’re describing entities, institutions, and actions we can actually study through observation (companies, households, the state; setting prices, launching product lines, working for wages, taking loans) rather than invisible abstractions whose existence and interactions we’re supposed to be able to infer indirectly from their secondhand effects (value, utility, preferences; demand curves shifting up and down, the money supply growing or shrinking, deviations from equilibrium due to market imperfections). In effect, the need for those old abstractions disappears, much as the discovery of natural selection suddenly made a creator god unnecessary to describe the design of the human eye or the peacock’s feathers. And it means that we are left with an economic theory that actually helps us do things, illuminating the world around us by expanding our capacity for successful action.

Origins of an intellectual rebel

The Lees were a left-wing family; Lee’s parents were both deeply ensconced in the politics of the New Deal era.10Unless otherwise noted, the details in this section on Lee’s family and early education come from his short autobiographical essay “Predestined to Heterodoxy, or How I Became a Heterodox Economist” (2015), which can be found on his personal website. It was also published in Tae-Hee Jo & Zdravka Todorova (eds.), Advancing the Frontiers of Heterodox Economics: Essays in Honor of Frederic S. Lee (2015) – but why on earth would you pay $48.95 to read it there? His dad Sterling Lee was a labor lawyer working for the National Labor Relations Board. His mom Marian Burks Keddy was an organizer with the League of Women Voters.11For the parents’ names and the League of Women Voters detail, see the online collection of texts drawn from Lee’s memorial service and obituaries in Tae He Jo (ed.), Tributes in Memory of Frederic S. Lee (2015), p. 20.

They were, the both of them, red diaper babies. On his father’s side there was a grandfather, also a lawyer, who spent the 1920s and 30s writing legislation on behalf of the more radical elements of the Roosevelt administration, particularly in the field of government price controls for agriculture. Lee describes his dad as growing up in a home where a revolving cast of characters—government officials, lawyers, union staffers, and civil rights activists—drifted in and out as if on a carousel, buzzing with discussions on “pressing economic and social issues” each time they visited. At law school Sterling took one class with neoclassical economist Fritz Machlup before declaring “the subject matter such nonsense that he left the course and has never taken another economics course since”—he much preferred the company of the famous Neo-Marxist Paul Sweezy, with whom he occasionally grabbed coffee. Things were if anything more radical on Marian’s side, immigrants from Britain. Her grandfather had been in the socialist Independent Labour Party (ILP)12The ILP—which at various times included such radical luminaries as Keir Hardy, George Orwell, CLR James, Ethel Mannin, and George Padmore as members—was for most of the twentieth century that rare thing: a militant, principled, and undogmatic party of democratic socialism. A big-tent organization that contained a broad spectrum of different socialisms, it was nonetheless united by the general policy that workers should own and self-manage the means of production—a notion which placed it consistently on the hard rather than reformist Left. Thus it was a party in which anarcho-syndicalists, moderate trade unionists, Fabian technocrats, Labour Party social democrats, and Trotskyists could coexist and cooperate; it engaged in both electoralism and direct action, supported strikes and anticolonial rebellions, and even sent volunteers like Orwell to fight with their sister party the POUM in the Spanish Civil War. After merging and disaffiliating with the UK’s main Labour Party various times, they’ve decided in the end (for better or worse) to settle as a far left pressure group within the former, which they remain to this day. and moved to North America “to escape the class system,” becoming a professor of political science.

By the time Lee himself came into the picture, the family home’s bookshelves were stuffed with radical political economy. As a connoisseur of such stuff, I must interject here with a note of admiration: particularly for the 1950s, that dreary age of McCarthyism vs. Stalinism, it was a wide-ranging and expertly curated collection. So yes, you had your copy of Lenin’s State and Revolution and “the works of Karl Marx” (notably including all “three volumes of Capital,” not just the first). But there were at the same time recent classics from all the heterodox economic schools, such as Institutionalism (Robert Brady’s Business as a System of Power, Clarence Ayres’s The Problem of Economic Order), Post-Keynesianism (Joan Robinson’s Introduction to the Theory of Employment, Accumulation of Capital, and Collected Economic Papers ; Piero Sraffa’s Production of Commodities by Means of Commodities), and Neo-Marxism (Baran & Sweezy’s Monopoly Capital). Then even more than now, it was extremely rare for any one academic to have stumbled upon and read all these, much less a family of lawyer-activists and not scholars. Touchingly, Lee mentions in a footnote that, with his parents’ passing, “much of the collection now resides on my bookshelves.” Their impeccable taste seems to have left a lasting impression—he cites this family history as evidence that he was “predestined” to become a heterodox economist, long before he even knew what that was.13Decades later, in an interview with URPE towards the end of his life, Lee makes the connection even more explicit—these bookshelves made him aware of the existence of an alternate possibility to mainstream economics before he’d even been exposed to the mainstream, influencing his decision to pursue this research programme later:

I knew by the time I got involved in economics that there was something different—not that I knew a great deal about what was meant by different; not that I knew anything about Marx, even though I’d read Volume I probably a couple of times, various shorter pieces of Marx (because we had all his collected works in the house); but I knew there was something different. My father also had Piero Sraffa, Joan Robinson, Maurice Dobb on his bookshelf. So this showed something different, without my really knowing anything—basically not stupid but ignorant, but at least with eyes that are open, is the best I can claim for myself somewhere up until my early 20s in the early 1970s.

See “Fred Lee” (7 November 2016) on YouTube (2:33-3:49).

In one sense, Lee knew what he wanted right from the start. In another, he had to hop around a bit before he found his way. It sort of depends on how you slice it: social theory was clearly his abiding interest from his very earliest moments of intellectual awakening, but the unified understanding of human culture and relationships he sought proved elusive, split up as the relevant knowledge was between all the disciplines of the human sciences. So he set out initially to be a history professor—a fact which, with characteristic precocity and bluntness, he announced in his high school yearbook.14Ibid. (8:29-8:40). He got his bachelor’s in the subject at Frostburg State University, a small college in Maryland, in 1972. Lee describes himself as initially having been a mediocre student, apathetic to his studies and apolitical in his commitments. But all of a sudden after his second year, “for reasons lost to memory, I began reading books more intensely and expanding my intellectual horizons.” And in his final year he was seduced by that familiar succubus of philosophy, which seemed to promise insight into the deep ocean of whose mere surface waves history was the chronicler. The reasons seem less mysterious when you note what was going on in the broader culture. “The Vietnam War, civil rights, and the women’s movement made little impression on me” at first, Lee writes. “But this changed during the summer of 1970.” Of particular interest was the cutting-edge new philosophy of science—probably Kuhn and Lakatos—a longstanding influence that would prove decisive in his later work. Then, just as suddenly, there came another betrayal. In a curious echo of Marx’s lifetime trajectory, Lee began to think philosophy’s most urgent concerns were only really being taken up elsewhere. “My interest in the subject began to wane,” he writes, “once I realized that after 1800 the really interesting social questions were not being examined by philosophers, but by economists.”15In the URPE interview years later, he elaborates:

At least the early philosophers—from Plato, Aristotle onwards until at least the nineteenth century—asked interesting questions (whether you liked them or not) and had interesting answers; and these answers were directed at society. In the mid-nineteenth century, it becomes much more analytically oriented; the kind of questions they were interested in no longer seemed to be interesting. Marx, I would argue, felt the same way. And economics is what fills the void—and that’s what it did for me.

Ibid. (6:21-7:11).

And so, having just wrapped up his undergraduate education, Lee decided to change course entirely. From here on out, economics was to be his vocation. But not just any economics, and certainly not the kind that had disgusted his father in law school. It had to be a historical economics, whose object of study was not eternal laws of efficient exchange but the many forms political economy can take depending on the evolving cultural and institutional structures within which it’s embedded; a philosophical economics, capable of thinking critically about its own methodological limits even as it asked the most profound ethical and ontological questions; and a radical economics, which like the books on his parents’ shelves challenged the capitalist system he increasingly found himself opposing. This was a path that would require no small amount of wandering. But luckily, Lee had met the remarkable Ruth Buschman on a hayride16In what’s probably a telling reveal of my own class background as a petit-bourgeois Northeastern suburbanite, I’ve only just learned that a hayride is a rural tradition in the US and Canada where farmers take people on a ride in their tractors, dragged along in a wagon with haystacks for seating. Apparently nowadays it’s more of a tourist trap where one pays by the ride. in college, who “thought that a life without books, learning, social activism, and international travel was not a life worth living” and so “supported materially, emotionally, and intellectually my long trek to becoming a heterodox economist” (including “my terrible habit of buying lots of economic books no matter what the costs”). They got hitched after graduation and remained married until Lee’s death 41 years later.17It’s probably a good thing Ruth Lee couldn’t live without travel, since the couple did a lot of it. From Tae He Jo (ed.), Tributes in Memory of Frederic S. Lee (p. 20):

Places they lived include: New York City; Riyadh, Saudi Arabia; Edinburgh, Scotland; New Jersey; Riverside, CA; Chicago, IL; Stoke-on-Trent and Leicester, England. They also traveled in India, China, Australia, Pakistan, Lebanon, Iran, Mexico, Canada and throughout Europe and the United States.

In 1973 the Lees moved to New York. There he got his first job as a supply clerk for the Army Corps of Engineers, which involved managing their inventory of equipment. Lee didn’t seem particularly enthusiastic about government work, but he took full advantage of the perks: “The job was not difficult; thus I was able to read extensively on the job.” In this way he began his first deep dive into economics, devouring not only Schumpeter’s History of Economic Analysis but also (using it as a sort of map for the field’s greatest hits) dozens of the classics of political economy. Eventually he gained the confidence to enroll in classes at the New School, where he studied under Frank Roosevelt III18 FDR’s grandson—and a DuPont, to boot. He’s still alive, apparently, and is retired now after a long career as a heterodox economist with pink politics of the market-socialist variety. and Alfred Kahler. Roosevelt at the time was a dogmatic Marxian and forced Lee to eat his broccoli and study Volume I of Das Kapital. Kahler was in some ways the more intriguing figure—he had done “pioneering work on input-output economics,” a framework which is incredibly useful for large-scale economic planning, and had Lee read a number of esoteric articles by theorists from across the economic and political spectrum. Input-output thinking had a lasting influence on Lee, featuring prominently in his final book.

Lee’s New York days were cut short when the supply clerk job transferred him to the Middle East, of all places, in 1974. Fred and Ruth would spend the next two years living in Riyadh, Saudi Arabia, where the former managed a warehouse that furnished houses for the Army Corps of Engineers in the city. The Lees appeared to take it in stride. They all but adopted Ali Awadh Asseri, a young student from the local police academy whom they randomly befriended and hosted for waffles and pancakes every weekend. He would later grow up to become the Saudi Arabian Ambassador to Lebanon. One gets a sense of their relationship to the locals from Asseri’s account, at Lee’s funeral decades later, of the young economist’s “good deeds to some Saudi families who didn’t have refrigerators”—a tastefully ambiguous phrasing, it seems to me, given how Lee was uniquely positioned to procure such creature comforts for the needy.19Jo (ed.), Tributes, p. 4. Meanwhile, Lee was undeterred by the fact he still hadn’t wracked up many academic credits in his newly chosen field of study: he signed up for correspondence courses in “introductory micro and macro economics, labor economics, international economics, and calculus,” reading and passing exams on not only textbooks but another few dozen books of both mainstream and heterodox economics. By the end of it he’d inhaled another batch of big thinkers—Jacob Viner, John Bates Clark, John R. Hicks, Maurice Dobb, V. K. Dmitriev, Paolo Sylos-Labini, yet more Joan Robinson, and Michał Kalecki—all before he’d even gotten near an econ bachelor’s.

Not that he spent all his time reading in the A/C of his cozy military-issue bungalow. There are hints—sometimes even quite baroque ones, as suggestive as they are baffling—that this was a period of chaotic adventures for our budding radical. “During this time” he writes, “my most memorable experience was reading Roy Harrod’s The Life of John Maynard Keynes while spending an afternoon and early evening in a Beirut jail.” Lee doesn’t elaborate, nor can I find any further record of this incident anywhere on or off the internet.

In 1976 the Lees returned to New York, and this time Fred hunkered down to finish what he’d started. He was accepted into Columbia University’s School of General Studies—their program for unconventional undergraduates—and worked all through the next year until he got enough credits to get accepted into an economics graduate program. Columbia was a particularly fruitful period for Lee. He was beginning to dig deep into his lifelong passion: what is sometimes called industrial organization, the nitty-gritty of how capitalist corporations go about their business. “While there I read about everything I could find on costs, pricing, the determination of the mark up, and the business enterprise,” Lee wrote later of this time, “and the economists I read included Philip Andrews, Adrian Wood, Harcourt, Hall and Hitch and many others.”20Frederic S. Lee, “Short Bio” (undated).

More and more, Lee was reading what he didn’t yet know were called Post-Keynesians—and this deep dive would eventually land him a date with destiny. He’d just gotten to reading a book called The Mega Corp and Oligopoly: Micro Foundations of Macro (1976). This remarkable work was one of the few that brought together much of the disparate literature that Lee had been investigating on his own. It told of the strange world that had emerged in the industrialized countries after the war, one defined by the peculiar combination of large firms on the one hand and intense oligopolistic competition on the other (a combination mainstream economics found difficult to square). Using existing neoclassical theory, the book tried to reconstruct a series of historical stages whereby the competitive equilibrium of small firms had, supposedly, given way step by step to present reality. But as it progressed the book found these neoclassical assumptions less and less useful, even as it began to engage in more and more qualitative studies: case studies drawn from business history, sociological analysis of the management structures of particular corporations, and so on. Strikingly, The Mega Corp and Oligopolyalso speculated that studies such as this held the key to bridging the seemingly insurmountable gap between micro and macro economics. 

One day a teacher noticed Lee’s reading choices. “People got to know I’m this strange undergraduate and I read all this stuff on pricing,” Lee would later recall. “And they told me to go down the street and see this strange guy called Alfred Eichner.” It turns out the author of the book that was expanding Lee’s mind worked nearby at SUNY Purchase.21“Fred Lee” (7 November 2016) on YouTube (16:30-17:05) As Lee puts it in his autobiographical essay “Predestined to Heterodoxy”:

So in February 1977 I walked into Eichner’s office and said “Professor Eichner, I would like to talk about the determination of the mark-up.” And Eichner and I commenced to discuss it for the next hour. It was at this point that I got ushered into Post Keynesian economics officially so to speak. Eichner became my mentor, dissertation advisor, and a friend.

This meeting was to have a decisive effect on Lee’s trajectory. Eichner, it turned out, was not just some eccentric next door but one of the founders of Post-Keynesianism—among the most important heterodox schools—in the United States. Besides his research, Eichner engaged in a great deal of political organizing within the discipline of economics over the course of the 1960s and 70s, all in order to help create or maintain institutions where heterodox economists (not just Post-Keynesians like him but also Marxians, Institutionalists, and others) could be published and funded. Between his theories and his practice, Eichner was to become a model for the young Lee, who apprenticed himself and helped out in this research and organizing work. On returning home from that first fateful encounter, Lee told Ruth how it had gone and received a telling reply: she “noted with relief that there existed somebody like me in economics, that I was not alone.” Writing about the encounter himself years later, Lee said that it was “a significant event…perhaps the most important in my entire academic career.”

At any rate, this sketch ought to give you a sense of our protagonist’s striking personality. Lee’s was a restless and relentless intellect, burrowing deep into any given intellectual tradition or discourse until every vein was mined of ore before moving on to the next one. As a bookworm he was precocious, diligent, and systematic.22We can say this with precision because he kept exhaustive records. Footnote 4 of “Predestined to Heterodoxy” reads: “Starting in June 1971, I have maintained a record of all the books, articles, and papers that I have read by month and year. To date I have read 9260 books, articles, and papers (some more than once) over the past 33 years or approximately 280 per year.” This came with a certain mischievous streak—not only an instinctive disrespect for authority but a tendency to try to provoke its ire by inconvenient questioning. Yet this impulse was tempered by his respect for the nugget of truth in any established tradition and his insistence that any rigorous objection must be rooted in deep familiarity with rather than ignorance of the relevant material. Reflecting on his class with Roosevelt in an interview, for example, Lee once said “I can’t say we got along that well. I was an opinionated idiot.” His interviewer asks: “Don’t tell me you were raising issues with the Labor Theory of Value in a Volume I class…”; and Lee replies, with a guilty giggle: “Indirectly. But like I said, this was based on total stupidity. I apologized to Mr. Roosevelt later on.”23Ibid. (13:28-14:06).

It seems Lee was terribly lonely for a good long time, at least intellectually, before finding his people. And that’s understandable enough. He’d quite literally inherited these books, these traditions of free inquiry that had long been suppressed—his parents’ library was practically a time capsule of the dead social movements of the Old Left—yet who could he talk to about them? No wonder Ruth expressed relief upon his meeting Eichner. And perhaps, too, we shouldn’t be surprised that later on he developed such a mania for institution-building. The constructive response to loneliness is to aggressively seek out little communities where you can finally feel at home—and, where these don’t yet exist, to create them. This particular combination of drives and ambitions would serve Lee well in years to come, as he helped to organize the material and theoretical basis for a new heterodoxy in economics.

What’s So Heterodox About Heterodox Economics?

At the bottom of everything Lee ever did and wrote was an idea whose time has come: that mere critique has had its day, and we can in fact build a new and better economics on sounder foundations, a total replacement for the orthodox theory. A pity it couldn’t have come sooner; but then, there couldn’t possibly be a more appropriate moment than now. Never have the forces of orthodoxy been in greater disarray.

The Crisis of Economics

Essentially the trouble is this: mainstream economics doesn’t work. This is true across pretty much all levels of analysis. It can’t predict events in the world, its policy prescriptions lead to disaster when implemented, it lacks any coherent methodology for fixing itself. And yet, although these are now relatively uncontroversial statements, nobody knows what to replace it with. The discipline is having a meltdown, and its future is up for grabs.

It’s been a long fall from a great height. Starting in the 1980s and particularly after the fall of the USSR in 1991, economics became something like the emperor of the social sciences—a universal framework, in the eyes of many within and outside the discipline, describing the optimal and rational allocation of resources in all times and all places under all conditions. This crowning position came with certain perks. Overwhelmingly, it was economists who got tapped as high-level advisors to the governments and multilateral institutions of the post-Cold War international order; it was they who designed the schemes by which the economies of highly indebted developing countries were restructured; and it was they who rapidly transformed the formerly Leninist republics of the Soviet bloc into capitalist ones. Which makes it especially unfortunate that these experiments proved to be one disaster after another. The main effect of “shock therapy” across the world was greater inequality, lower living standards, more dictatorships, decaying infrastructure, and stagnating growth.24For more on the economic failures of neoliberalism, see “Socialism with an Anarchist Squint” in Strange Matters Issue One (Summer 2022), especially footnotes 1 and 3.

In particular, the economists’ effect on post-Soviet Russia itself lives forever in infamy: the complete annihilation of the existing economy, an explosion of gangsterism and criminality as oligarchs and their hired armies gobbled up parts of the old administrative state, ordinary people reduced to hunger and peonage, the eventual establishment of Putin’s far-right dictatorship to restore order, and living standards which to this day have not fully recovered. The economist Roger E. Backhouse, author of a respected history of orthodox economic theory, wrote a less well-known book in 2010 that’s strangely confessional about the Russian 90s. It doesn’t mince words:

A policy of shock therapy was introduced at the beginning of 1992, and it had dramatic results. Industrial production and national income fell rapidly for several years. By 1998 industrial production had fallen to 45 per cent of its 1989 peak, and gross domestic product (GDP) to 55 per cent. The fall in output over the first three years was comparable to what happened in the United States during the Great Depression of 1929—32. In Russia, however, the recession lasted far longer—seven years. At the same time, price liberalization, which caused an immediate 245 per cent rise in prices, led to uncontrolled hyperinflation. The worst year was 1992, when producer prices rose over 3,000 per cent, and it took several years to bring inflation under control. Because prices of basic foodstuffs, energy and transport were still controlled by the state (a policy that itself caused problems) consumer prices fell less, but real wages nevertheless fell dramatically, by as much as 60 per cent. The transition was a catastrophe.

As Backhouse methodically demonstrates, this calamity can’t simply be attributed to the Russian ruling class. Mainstream economists from the US and Western Europe played a direct and disastrous role in this drama, often pushing for more and faster privatization and deregulation. And Russia is just one such failure the book examines. Now, Backhouse is no rebel—he’s a company man through and through, with all the economic orthodoxy’s key credentials and the citations to prove it—but his book is wracked with guilt. He makes it his mission (never quite achieved) to figure out what could have gone so wrong within the discipline, to make such errors possible. Later he writes: “Western economics was not neutral; it played an important role in the political processes inside Russia…Had Western economics been different, the dynamics of the Russian political process might have led to a different outcome.”25 Roger E. Backhouse, “Chapter 3: Creating a Market Economy,” The Puzzle of Modern Economics: Science or Ideology? (2010), pp. 42, 46. While Backhouse is especially good for proving the critical role played by neoclassical economists such as himself in failures like the post-Soviet transition (a realization which, to his great credit, spurred him to write a book exploring the existential question the subtitle), you can’t get a complete view of the tragedy of the Russian 90s from the economic numbers alone. Any reading on the subject should be supplemented by journalistic and literary accounts, such as Svetlana Alexievich’s Secondhand Time: The Last of the Soviets (2016) and Mark Ames & Matt Taibbi, The eXile: Sex, Drugs, and Libel in the New Russia (2000).

Still, for all that, the hegemony of mainstream economics would easily weather these failures and persist for another few decades. We can learn a lot by observing how they wielded it. In this period at the turn of our century—at the height of their ascent—the orthodox economists exercised their power with arrogance, not restraint. Their numerous sins were all a variation on hubris. They promoted a toy model of the world which they readily admitted does not describe it, but chose to treat observable reality as a deviation from this model anyway, rather than ever questioning its foundational assumptions.26The model being that of general equilibrium, the deviations being all the supposed “imperfections” from real life which must be added to deform it into something that is at least not totally fantastical. Neoclassicals regard the core model as a necessarily simplified abstraction, with the various deviations as improvements that add to the realism by adding complexity. As we’ll see, Lee’s radical critique of this notion is that anything realistic is fundamentally alien to the core model, which is entirely fictitious rather than being a well-crafted abstraction from reality in the first place; and that it is in fact possible to begin with a totally different core model that is grounded in observables and does not suffer from any of the same problems requiring ad hoc additions of “imperfections” or other deviations. More on this later. They did this because they prioritized the mathematical and aesthetic beauty of the model over its ability to produce tangible scientific results.27Neoclassical economics is, of course, notorious for its “physics envy”, i.e. its profound desire to replicate both the methods and presentation of physics. In fact, several important equations for general equilibrium were originally derived, as if by a kind of perverse metaphor, from nineteenth-century equations for the then-new physics of energy. And in the twentieth century, the achievements of theoretical physics became the economists’ excuse for why their science could do without empirical observation for long periods, could adjudicate between hypotheses based on how pretty the math is, and so on—see Philip Mirowski, “Do Economists Suffer From Physics Envy?”, Finnish Economic Papers 5:1 (Spring 1992) as well as More Heat Than Light: Economics as Social Physics, Physics as Nature’s Economics (1989). Though ironically, if the economists had paid attention to any recent developments in the natural sciences, they might have picked up on a critical warning: in physics, they may be emulating a broken model. No less an authority than Sabine Hossenfelder, a leading theoretical physicist at the Max Planck Institute, passionately and convincingly argued in Lost in Math: How Beauty Leads Physics Astray (2018) that a fetish for beautiful math—the notion that an aesthetically pleasing theory must be right because beauty inheres in the order of the universe—has been a corrupting influence on particle physics and led it to utter stagnation for half a century. She writes:

I doubt my sense of beauty is a reliable guide to uncovering fundamental laws of nature, laws that dictate the behavior of entities that I have no direct sensory awareness of, never had, and never will have. For it to be hardwired in my brain, it ought to have been beneficial during natural selection. But what evolutionary advantage has there ever been to understanding quantum gravity?

And later she concludes: “In our search for new ideas, beauty plays many roles. It’s a guide, a reward, a motivation. It is also a systematic bias.” Instead, in the absence of an ability to do cheap experiments any longer, Hossenfelder recommends looking for places where existing theory breaks down (whether by its internal inconsistencies, or its inconsistencies with good data), changing it only in ways that make it more consistent, and then developing experiments to test it again until it fits. Now wouldn’t that be a fine example for economic research? 
Having made incorrect policy recommendations leading to mass death, dictatorship, and the destruction of national economies, they suffered no real consequences for it as individuals or as a profession—if anything, the tendency was to double down or even reward each other in the face of failure.28In “How the Economists Got It Wrong,” James K. Galbraith gives a great example of this impunity as it existed in 2001. He identifies “five of the leading ideas of modern economics,” namely:

1. Inflation is everywhere and always a monetary phenomenon
2.Full employment without inflation is impossible.
3.Rising pay inequality stems from technological change.
4. Rising minimum wages cause unemployment .
5. Sustained growth cannot exceed 2.5 percent per year.

Then, he goes on to demonstrate, point by point, how “evidence flatly contradicts each of the five dogmas I have just listed,” which had dominated the field for decades. This in itself isn’t a problem; science proceeds one refuted hypothesis at a time. But Galbraith’s Biblical rage stems from the way these failed dogmas “continue to form part of the core ideology of the economics profession…And they equally continue to underpin many economists’ interventions in the policy sphere.” The recommended policies, in turn, were enormous disasters, resulting in the Asian financial crisis and the mobster-ruled Russia of the 90s. Yet far from being forced to defend or justify themselves, the architects of these failed policies were the ones laying out the narrative (conveniently lacking any critique of themselves) at the conference about which Galbraith was writing so acidly. “Never, perhaps,” he notes, “has such a luminous crowd gathered to discuss so disastrous a set of its own failings.” Then as now, no fundamental critique was possible within the official channels.
They were deeply dismissive of studying the history of their own discipline, eliminating whenever possible course offerings on the history of economic thought, restricting graduate and undergraduate education to classes parroting the current received wisdom.29As Robert Skidelsky—the renowned economic historian and biographer of Keynes—summarizes:

‘What useful purpose can be served by the study of absurd opinions and doctrines that have long ago been exploded, and deserved to be?, asked J.B. Say (of Say’s Law fame) in the early 1800s. ‘It is mere useless pedantry to attempt to revive them. The more perfect a science becomes the shorter becomes its history… Our duty with regard to errors is not to revive them, but simply to forget them’. One wonders whether Say would be flattered or horrified, then, to learn that his ‘law’ was still being taught to students 200 years on. Here is Robbins a hundred years after Say: ‘It may safely be asserted that there is nothing which fits into the old framework which cannot be more satisfactorily exhibited in the new.’ The only difference is that ‘at every step we know exactly the limitation and implication of our knowledge’. In our own times, George Stigler has asked: ‘Does Economics Have a Useful Past?’ and concludes that it doesn’t: ‘one need not read in the history of economics… to master present economics.’

See Skidelsky, “Chapter 10: Why Study the History of Economic Thought?”, What’s Wrong With Economics?: A Primer for the Perplexed (2020).
Not content merely with banning criticism, they then proceeded to engage in a sort of cross-disciplinary imperialism, insisting that precisely the weakest parts of their theory had universal validity, aggressively exporting these into neighboring fields like political science and sociology.30For defenses and sympathetic descriptions of this “economics imperialism” by neoclassical economists, see George J. Stigler, “Economics: The Imperial Science?”, The Scandinavian Journal of Economics, Vol. 86, No. 3 (Sep., 1984), pp. 301-313; Edward P. Lazear, “Economic Imperialism,” National Bureau of Economic Research Working Paper no. 7300 (August 1999); and Roger E. Backhouse, The Ordinary Business of Life: A History of Economics from the Ancient World to the Twenty-First Century (2004), pp. 311-315. For some pretty definitive and devastating critiques of it from the view of the heterodoxy or the disciplines being invaded, see Ben Fine, “Economics Imperialism and Intellectual Progress: The Present as History of Economic Thought?”, History of Economics Review, 32:1 (2000), 10-35 as well as “‘Economic imperialism’: a view from the periphery,” Review of Radical Political Economics, 34(2) (2002), 187–201; and Nancy MacLean, Democracy in Chains: The Deep History of the Radical Right’s Stealth Plan for America (2017). Wherever they ruled in the social sciences, they encouraged incuriosity, small-mindedness, false certainty, and apologism for the status quo.

History will regard their reign as a cautionary tale. It took the Great Recession for us to shake loose of them.

The 2008 crash and its consequences have been a disaster for the economists. Whatever the special pleading one occasionally hears to the contrary, the OECD countries have never truly recovered from it, even as other shocks have followed in subsequent decades. And the culture has evolved accordingly. One can surmise something of the character of the economists’ subsequent standing from this illustrative snapshot:

On 5 November 2008, Her Majesty Queen Elizabeth II was opening a new building at the London School of Economics. Speaking of the credit crunch, she turned to some of the economists present and said, ‘It’s awful. Why did no one see it coming?’ Journalists, not constrained to be diplomatic, were more forthright in condemning economists. For Anatol Kaletsky, one-time economics editor of the Times, ‘Economists are the guilty men’ (the Times 5 February 2009). The economics editor of the Guardian, Larry Elliott, claimed that ‘as a profession, economics not only has nothing to say about what caused the world to come to the brink of financial collapse … but also a supreme lack of interest’ (the Guardian 1 June 2009). Writing in the same newspaper, Simon Jenkins attributed this failure to the fact that ‘Economists regard it as their duty fearlessly to offer government what it wants to hear. … Don’t rock the boat, says the modern profession, and the indexed pension is secure.’ The whole economics profession, he contended, had ‘suffered a collapse’ (12 November 2008).31Backhouse, The Puzzle of Modern Economics, p. 1.

If you can believe it, the situation was somewhat worse even than Lizzie made it out to be. It’s not just that, as the old potentate’s question suggests, the experts failed to see the crash coming. Their pet policies of deregulating finance had largely precipitated it, for one. And they had also, for the most part, generated models of what the economy is and how it works which had led them to declare such a crash was outright impossible —right up to the moment it happened. “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” testified Federal Reserve Chairman Alan Greenspan before Congress. “The whole intellectual edifice, however, collapsed in the summer of last year.”32Edmund L. Andrews, “Greenspan Concedes Error on Regulation,” New York Times (23 October 2008). Incidentally, readers unfamiliar with the has-beens of high neoliberalism may be tickled to learn that Greenspan was, in his youth, a literal disciple of Ayn Rand, participating in the small cult that grew around her in the 1970s. Alas, despite this literary grouping’s salacious reputation, I’ve never been able to uncover any evidence that, like fellow cult member Nathaniel Branden and others, Greenspan himself slept with the guru of Objectivism. Still, there is something almost parable-like about this career trajectory. For more, see Christopher Hitchens, “Greenspan Shrugged” in Vanity Fair (6 December 2000). What’s worse, this massive humiliation of the economic orthodoxy was attached at the hip to an equally massive victory for the economic heterodoxy. For it was precisely economists of the dissident schools—employing completely different models from those of the mainstream, rooted in different principles derived from the historic analysis of financial markets—who did successfully predict the crash. And not just in the manner of those dogmatic Marxists who, as the old joke goes, “predict” 12 of the past 2 crises of capitalism. Rather, using tools like stock-flow consistent models and Minskyan crisis theory,33 A stock-flow consistent or SFC model maps flows of money across an economy using a framework drawn from accounting, tracing the flow of funds across an economy-wide network of interlinked balance sheets where someone’s asset is always someone else’s liability and vice versa. If you have the real-world data from the balance sheets you’re trying to map, you can use these models to make predictions about how the flow of funds will change under different conditions. (This is in stark contrast to the dynamic stochastic general equilibrium or DSGE models used in mainstream economics, which try to fit historical data to a model which assumes the economy is or soon will be in a general equilibrium of supply and demand under conditions of perfect competition, towards which it is always trending.) It’s the former which predicted the 2008 crash and the latter which deemed it impossible, more or less. What I’ve called Minskyan crisis theory is a series of general principles outlined by the Post-Keynesian economist Hyman Minsky in books such as Stabilizing an Unstable Economy (1986) and John Maynard Keynes (1975) that explain the root causes of financial crises such as those of 1929 and 2008. The theory is too complex to summarize in this short a space, but here’s the basic gist: certain behaviors inherent to the nature of capitalist investment lead financial market participants, when times are good, to back more and more of their investments only with debt instruments of an increasingly flimsy and risky character, even though the aggregate effect of such behavior over time (since all balance sheets are fundamentally interconnected, as per SFC models) is to radically destabilize the system; eventually just one sufficiently networked participant defaulting on their debts can trigger a collapse of the whole financial economy; and this occurs because when a sufficient proportion of the financial sector is made up of these bad assets—what Minsky calls, amusingly, an age of “Ponzi finance”—no one has anything but junk with which to repay their creditors, across the whole chain of interlinked debt obligations. Hence the famous Minskyan slogan, “stability breeds instability”: as long as financial capitalists have any ability to engage in risky behaviors, then even a period of economic prosperity lays the groundwork for its own self-destruction due to this cycle, which produces the massive sell-offs, debt deflation, wave of bankruptcies, and persistent underinvestment and unemployment we call “stock-market crashes” or “depressions.” In 1998 the financial analyst Christopher Wood termed such a crash a Minsky Moment—see Justin Layhart, “In Time of Tumult, Obscure Economist Gains Currency,” Wall Street Journal (18 August 2007). It was widely acknowledged after 2008 that the Great Recession was inaugurated by precisely such a Minsky Moment. After all, the mortgage-backed securities and collateralized debt obligations with which Wall Street crashed the housing market and then the entire economy were, in both their nature and motivations, precisely what Minsky called “Ponzi finance.” And the 1929 financial crash that set off the Great Depression, too, can be analyzed in something like these terms, and has—see John Kenneth Galbraith, The Great Crash, 1929 (1955). No wonder, then, that it was heterodox economists armed with these tools who were able to see our own Great Recession coming. heterodox economists such as Wynne Godley and Michael Hudson not only proclaimed in print (far in advance) that a financial crisis would happen but also identified its specific origin and causes in the real estate market. Here was as neat a natural experiment as anyone could ask for, and the winner was clear to anybody with eyes to see.34For a more detailed and technical account of this natural experiment, see Dirk J Bezemer, “‘No One Saw This Coming’: Understanding Financial Crisis Through Accounting Models,” MPRA Paper No. 15892 (24 June 2009). A particularly amusing, concise, and devastating illustration of the sheer inferiority of neoclassical economics’ DSGE models to the accounting-based models of the heterodoxy, see Table 2.1: “Anticipations of the Housing Crisis and Recession” on p.13 of Steve Keen’s Debunking Economics: The Naked Emperor Dethroned? (2011), which literally lists the heterodox thinkers by the date of their predictions and uses quotes to demonstrate their precise understanding of the specific causes of the “impossible” economic crash before it happened.

In our wider culture, this was the rout of economics and the end of its preeminence in the formation of my generation’s intellectuals. But if you thought it’d dethrone the orthodoxy within econ, you don’t really get how it all works. Today the heterodox thinkers are still in the same marginal spaces as ever; the mainstream economists retain their iron grip over the infrastructure of the profession; and much of what they’ve done since is a hasty rearguard action as they scramble to recover their lost popular appeal.

And so, for example, the economists started to pretend they’d reformed themselves. That’s how we got the “behavioral economics revolution,” for example, of the early 2010s. In a reversal of their old academic imperialism (an adverse shift in the interdisciplinary balance of payments, let’s call it), the economists desperately started importing conceptual tools from abroad to bolster their theoretical apparatus. Of course anthropology, sociology, and history would have been too risky a choice—the way these fields cover the same ground as economics challenges the orthodox model in too fundamental a way, you see—but psychology, with its focus on individuals, was the perfect quick fix. Thus the economists amended some of their theories’ minor or secondary components: economic agents were no longer rational utility-maximizers but “rationally irrational,” that is, irrational in predictable ways due to cognitive biases studied by psychology. Some clever economists then translated the relevant psychological research into math and plugged it into their pre-existing theory where previously a cruder decision theory or utility function had stood. One might have some concerns about importing from psychology, given its own replication crisis.35The replication crisis in the sciences—at whose unfortunate forefront is the very field of psychology upon which the orthodox economists rest their hopes—is the simple problem that, when scientists attempt to replicate the experiments in prominent papers whose results get boosted by the press on a regular basis, they cannot get the same results by the same methods. Unfortunately, this failure to replicate happens a lot, and such an event is generally considered to invalidate a hypothesis. One particularly egregious survey by Nature found that over 70% of researchers profiled had failed to replicate a result—see Monya Baker, “1,500 scientists lift the lid on reproducibility.” Nature 533, 452—454 (2016). For the impact in psychology, see BJ Wiggins & CD Christopherson, “The replication crisis in psychology: An overview for theoretical and philosophical psychology.” Journal of Theoretical and Philosophical Psychology, 39(4), 202—217. Some of the statistical fudging, sloppiness, and trickery implicated in the replication crisis in psychology is perfectly applicable to econometrics, and one can only wonder, given how badly economists perform in the realms of theory and history, whether the “empirical turn” of recent years isn’t tainted by the same plague of false results. But the bigger problem is that this procedure leaves the basic logic of the mainstream theory intact: when you at most swap out a module or sub-component for something new, and that new bit has a completely different logic and motivation from the theory it supposedly “fixes,” it’s hard not to suspect that all you’ve done is put lipstick on a pig. And if the core model has severe enough fundamental flaws, such a “reform” will only lead to more incorrect predictions, no matter how realistic the assumptions of the concepts you’ve swapped in. The heterodox economist Werner Güth calls these crude band-aids neoclassical repairs—keep this idea in mind, as we’ll return to it again and again.36Funnily enough, there’d actually been a heterodox school of economics in the 1950s—genealogically close to the Institutionalists—that called itself behavioral economics, and was similarly interested in using psychology to expand economic theory. However, this Old Behavioral Economics (as it’s now being called) was much more radical in its rejection of the core neoclassical theories of supply-and-demand, revealed preferences, and behavior optimization. Old Behavioralists like Herbert A. Simon and George Katona replaced such models entirely with those derived from studies of actual decision-making processes by real-world economic agents and the heuristics they use to make sense of a complex world under conditions of radical uncertainty. By contrast, the post-2008 New Behavioralists—the ones winning all the recent Fake Nobels, like Richard Thaler and Daniel Kahneman—are putting band-aids on a broken mainstream theory. But it turns out that some successors to the Old Behavioralists are still around, and they aren’t at all happy about this state of affairs. One writes: “[W]hereas Simon proposed a brand-new model that completely upset the supporters of optimization theory, these other economists tried to integrate empirically discovered anomalies of human behavior into the well-known formal models, with axiomatic foundations and utility-maximizing functions”—Veronica Ermini, “The other side of Behavioral Economics: old and new, a theoretical dispute” in B.Bias Blog, Bocconi University (1 December 2022). For a more technical critique, see Werner Güth, “(Non)behavioral economics: A programmatic assessment,” Zeitschrift für Psychologie/Journal of Psychology, 216(4), 244—253 as well as Philip Mirowski & Edward Nik-Kah, The Knowledge We Have Lost in Information: The History of Information in Modern Economics (2017).

Less often, and more insidiously, the orthodox have been known to simply steal ideas from the heterodox without citation. Here the discourse of economics can reach sublime heights of gaslighting. A skillful economist can quietly adopt concepts from the dissident schools; paraphrase them in their own language, in newspaper thinkpieces or interviews lacking any specific citations; and, having thus laundered the ideas to make them more acceptable in polite company, treat continued criticism of the economic orthodoxy as “out of date.” The true virtuoso can even accomplish all this while simultaneously insulting, denigrating, belittling, and institutionally isolating the very heterodox economists from whom they stole the idea in the first place. Celebrity economist and New York Times scribbler Paul Krugman could give a master class on this sort of thing, given his hideous and dishonest conduct towards Post-Keynesians and chartalists over the years.37To name one easily citable example: Paul Krugman rarely misses an opportunity to casually and superficially bash Modern Monetary Theory (MMT), the most common form of chartalism nowadays, alternately for its exaggerations and its vagueness. But on the rare occasion Krugman’s own critiques get specific, they’re liable to unmask his own extreme hypocrisy. So, for example, in a 2012 column he blasted Steve Keen and other “self-proclaimed true Minskyites” with chartalist commitments of “view[ing] banks as institutions that are somehow outside the rules that apply to the rest of the economy, as having unique powers for good and/or evil.” He’s referencing the theory of endogenous money, a chartalist model of banking which says that banks don’t loan out of deposits but rather literally create new money with every loan they issue. With magisterial smugness, Krugman affirms (with no evidence, of course) that “banks don’t create demand out of thin air any more than anyone does by choosing to spend more; and banks are just one channel linking lenders to borrowers” – in other words, the mainstream theory where banks must first collect and then lend scarce loanable funds. See Paul Krugman, “Banking Mysticism [!!!],” New York Times (27 March 2012). Unfortunately for Krugman, this is an empirical question with a definite answer: endogenous money theory was derived from studying real-world banks, and the most useful models of the financial system all integrate it. So perhaps we shouldn’t be surprised that a decade later, in a tweet on 26 October 2021, Krugman matter-of-factly upholds precisely the opposite of what he once smugly argued: “So M1 and M2 [the money supply] are no longer policy variables, even potentially; they’re determined mainly by demand for deposits, and the Fed can’t change that through its operations. As I said, money is endogenous.” Did he cite the origin of this idea? Did he admit he had been wrong previously? Did he, in light of a clear influence on his own thinking, apologize for his dismissive mockery of such ideas in his highly influential column? Of course not – in fact, at one and the same time that he was expropriating a key MMT idea (“as I said”!), he continued uninterruptedly in his boundary-policing exclusion of those ideas from the field of respectable intellectual discussion. This is unfortunately the norm and not the exception in economics; the neoclassical orthodoxy doesn’t engage its antagonists in free and open debate, preferring in fact to suppress precisely the intellectual history and transparency of commitments which would be a prerequisite for such a conversation, all while monopolizing the large-scale institutions for creating new grad students and disseminating information to the public. But he’s merely one of various successful cases.

And finally, there’s been the so-called “empirical turn.” After all, the failure of the mainstream theory was so transparent after the Recession that even young new grad students in orthodox departments hesitated to simply reproduce it. So, common wisdom goes, the most ambitious new work has dropped theorizing altogether. Without questioning or overturning the established doctrine, many young economists have simply chosen to ignore it and study real-world data using econometrics—that is, the tools of statistics—without any theoretical underpinning whatsoever. The standard-bearer here is Thomas Picketty with his historical studies of income inequality. Now, this is wholesome as far as it goes, but it leads to some ugly contradictions. For one, amusingly, it means there’s little to no overlap between what people will have learned in their textbooks and what they’ll be up to when studying (say) national accounts or central banking or development, at least if they’re at all competent. Then there’s a question of value-added: if the practical upshot of majoring in economics is that the researcher learns how to run data through R, then why not simply become a data scientist or a statistician instead? What’s economics really bringing to the table here? And finally there’s the greatest danger: you can’t actually operate “without” a theoretical framework at all; if you think you are, it means you’re completely blind to your own presuppositions and methods of interpretation. All this makes you even more prone to confirmation bias than if you were consciously committed to some theory. What’s worse, it leads to incoherence. When looking at some concrete situation, after amassing all the data, the typical economist today does fine until precisely the moment they need to explain it. Then, chaos: they’ll take bits and pieces of whatever grand theories they have floating in their heads, often drawing from more than one of them at once (even when they can’t both be true!), fitting them to the data until it looks like they’ve come up with a causal account. As you’d imagine, this all too often merely proves whatever they wanted to be true in the first place.38The heterodox economist JW Mason is particularly good on this. He writes, of the typical economist at work:

I think there is a mix of common-sense opinions, political prejudices, conventional business practice, and pragmatic rules of thumb, supported in an ad hoc, opportunistic way by bits and pieces of economic theory.


Which subset of these mutually incompatible stories does the “mainstream” actually believe? I don’t know that they consistently believe any of them. My impression is that people adopt one or another based on the question at hand, while avoiding any systematic analysis through violent abuse of the ceteris paribus [“all else being equal”] condition.

To paraphrase Leijonhufvud, on Mondays and Wednesdays wages are low because technological progress has slowed down, holding down labor productivity. On Tuesdays and Thursdays wages are low because technological progress has sped up, substituting capital for labor. Students may come away a bit confused but the main takeaway is clear: Low wages are just the natural outcome of economic fundamentals, of structural factors – whatever those may be.

From ““When We Turn to Concrete Economic Questions…”, Evonomics (17 July 2016).

And that, in a snapshot, is economics today: a vicious old patriarch sitting atop his throne, clinging to his scepter, senile and delirious, yet somehow still whacking over the head anyone who dares approach him with a challenge. It is, as the heterodox economist Ha-Joon Chang has said, the “language of power”—one that obfuscates far more than it explains.39“Learn the Language of Power [Ha-Joon Chang]” on YouTube (30 October 2017).

Lee Uncovers a Lost History

Now, we have to remember that Lee only in his later years enjoyed the post-2008 collapse of the public’s faith in the orthodox economists, spending the better part of his career during their ascent and peak. Lee’s great aspiration from very early on was to replace the entire edifice of this theory with a totally new one.40 Lee said this often. One example of many: “A heterodox microeconomic theory is in the making,” he once wrote, “that replaces NCMT [neoclassical microeconomic theory] in its entirety, that utilizes a methodology completely different from deductive-assumption-based methodology used to develop NCMT.” See Footnote 6 in Frederic S. Lee & Steve Keen, “The Incoherent Emperor: A Heterodox Critique of Neoclassical Microeconomic Theory,” Review of Social Economy, Vol. 62, No. 2 (June 2004), pp. 169-199.

But confronted with an enemy that completely controlled the discipline, Lee (like all his heterodox peers) found himself in a tough spot. For the lay public there was only one economics, and the orthodox economists were its prophets. Even a proper debate, much less a shake-up of who staffed departments, was effectively impossible. And the fewer journals and departments the heterodoxy controlled, the fewer people were liable to even come into contact with their ideas.

All this is why so much of Lee’s earliest research was historical in nature. Much of the knowledge of how the orthodox and heterodox schools of economics emerged, what precisely distinguishes one from the other, how the former had taken over economics in the US and UK—all this was either split up between a million journal articles or simply nonexistent at the necessary level of detail. In uncovering and synthesizing much of this history, Lee employed not only a historical but a sociological approach. With a cold eye and laser precision, he traced out how power within the discipline is adjudicated not by honest deliberation but by dictatorial control over a small cluster of institutions within academia. The findings of Lee’s many decades of research into this topic were summarized in his History of Heterodox Economics (2011), which during his lifetime was (somewhat to his regret) his most famous work. Many heterodox economists have found that it’s only once armed with the knowledge one finds there that they can carve out a space for themselves in the academy and properly begin their fight against the establishment.

Passages from Political Economy to Economics

When you sit down to try, studying the history of economic thought turns out to be exceedingly difficult. The economists, as we’ve seen, have largely suppressed it. And this means that the resources available are uneven at best. You can get yourself a potted history of “economics,” which will largely treat the current orthodoxy as the only branch that ever mattered; or a specialized study focused on one particular thinker or debate, which will at best fill in only its particular time period and context; or a history of one of the heterodox schools by its practitioners, which will all likely ignore both each other and the mainstream. And then the sources will contradict one another on the facts—though it may be hard to tell at first either way, since they’ll use vastly different language to describe the same things, whether they’re concepts or real-world entities.

It’s all a mess. Still, there does exist a lowest common denominator of knowledge that the relatively small number of people one might call well-informed on the matter can agree upon before they set upon one another in vicious controversy. To get our bearings, it’ll be helpful to skim briefly across these facts which “everyone knows,” so to speak, as they’ll help contextualize Lee’s arguments in the History.41What follows is a crude journalistic sketch of how the various schools of economics relate to each other. Unless otherwise noted in its own footnote, you should check my claims against any or all of the various resources I consulted holistically in drafting it. The bulk of the historical facts come from William J. Barber, A History of Economic Thought (1967), whose miraculously neutral perspective probably owes much to the author’s origins in developmental economics, this subdiscipline at the time having been rather insulated from neoclassical dogmatism; Gonçalo L. Fonseca’s indispensable History of Economic Thought Website, particularly its “Schools of Thought” directory and associated articles; and Krishna Bharadwaj, Classical Political Economy and the Rise to Dominance of Supply and Demand Theories (1986), a Sraffian/Post-Keynesian account of classical political economy from a heterodox perspective that was hugely influential on Fred Lee’s thinking. I have supplemented my paraphrase of these sources with perspectives influenced by more theoretical sources, such as (again) Krishna Bharadwaj, Themes in Value and Distribution: Classical Theory Reappraised (1989); Piero Sraffa, “Introduction” to The Works and Correspondence of David Ricardo (1951); Jonathan Nitzan & Shimshon Bichler, Capital as Power: A Study of Order and Creorder (2009); and Steve Keen, Debunking Economics: The Naked Emperor Dethroned? (2011); as well as my own reading of the key works of Quesnay, Smith, Ricardo, and Marx. The complexities of the topic mean that I’ve necessarily had to simplify, and its controversies mean that inevitably there will be those who question my interpretations. If nothing else, I aim to have been a loyal summary of the sources I used to reconstruct this complicated intellectual history.

Once upon a time, what we call economics was instead something called political economy. This field emerged in the early modern period out of moral philosophy on the one hand and guides for princes about how to rule states on the other. It concerned the causes of a country’s wealth or poverty; the policies required to secure the former; and the institutions and social classes which variously implemented, benefitted from, or were subject to such policies.

Generally it’s said (and of course this is wrong)42It isn’t merely that predecessors like the School of Salamanca in Spain anticipated Smith’s ideas. It’s also that his own contemporaries can be considered to have created both earlier and better theories on which to base the new field of political economy—particularly James Steuart (1713-1780), the so-called “mercantilist” whom Smith wrote so much against, whose theories of international trade and capitalist development by primitive accumulation were far more realistic than anything that would follow him until Marx, whom he anticipates. For more on pre-classical economics, see Arthur Eli Monroe, Early Economic Thought: Selected Writings from Aristotle to Hume (1951). For more on Steuart, see Michael Perelman, The Invention of Capitalism (2000). that political economy properly so-called begins with Adam Smith and David Ricardo. The former in his famous Wealth of Nations (1776) and the latter in his Principles of Political Economy and Taxation (1817) introduced a set of ideas which came to be known as the classical school. For these theorists, wealth meant the totality of tangible products43Careful readers will note this definition of society’s economic surplus doesn’t include services. And that’s exactly how your typical economist of the classical school will tend to think. Notably, the classicals had a habit of distinguishing between productive labor (which contributes to the surplus) and unproductive labor (which merely leeches off it in order to perpetuate itself). Unfortunately, the classicals don’t agree with one another on where to draw this crucial line—sometimes, they don’t even agree with themselves. Hence Quesnay and the physiocrats say the only truly productive labor is agricultural labor, since without food no other occupation could exist and thus all are ultimately parasitic on the agricultural surplus; while Smith and Marx tend to include not just agriculture but all manufacturing in their surplus and exclude services, treating them as useless professions—except of course when they contradict themselves on this point and treat certain services, like transport and education, as the production of necessary service inputs into surplus production. This is all very confusing, and rather more moralizing than scientific. As we’ll see, Lee’s account of the surplus pretty magisterially dissolves this distinction into his more grounded categories: all production is just production, goods and services alike; it can be accounted for in both biophysical and monetary terms as a surplus over the cost of the current going concern reproducing itself, whether on the scale of the individual productive unit or the going economy as a whole; and the overall configuration of the economy—which industries exist or don’t exist, their relative proportions, etc—is not good or bad according to some pre-existing standard of “productivity” or “optimality” but rather is the end product of the decisions of whichever agents (who probably have different ideas of what that configuration ought to be) are in a position to control reinvestment of the surplus after class struggle has run its course. In other words, different individuals or groups may have a different idea of what goods and services ought to be produced; depending on whether they can successfully claw some of society’s surplus into their own pockets, they may or may not be able to succeed in reproducing over time the goods and services they wish to see in the world. produced by a society through its collective labor process—when that pile of stuff is bigger, a society is wealthier. That said, it takes stuff to produce stuff—for instance, it takes food to feed the farmers who grow food. And so, when you take society’s total output (all the stuff produced this year) and subtract its maintenance costs (the portion of that pile of stuff that was consumed while you were producing the pile) you get what classicals call the surplus. If these leftovers exist, and if part of them is reinvested to expand production and produce an even bigger surplus next year, then society is growing wealthier. But not all of it is reinvested—people need it to survive, or, as the case may be, to maintain the lifestyle to which they’ve become accustomed. In fact the classicals sort people into classes based on how they get their slice of surplus: the landlords, from rents; the capitalists, from profits; and the workers, from wages. (Naturally the first two classes decide on their slice of the surplus, while the third must take whatever it’s given.) Finally, because everything requires paid labor to be produced, the cost of wages is both the main determinant of prices and the ultimate limit on long-term growth—what later came to be called a labor theory of value. Classicals tended to believe wealth grew only when labor was kept cheap and the prices of goods tended towards their cost of production, a happy set of circumstances that occurred when the economy was guided not by cartels or the government but the invisible hand of the free market.44Interestingly, the self-regulation mechanism identified by the classical school is completely different to that identified by the neoclassical school—both say “competitive free markets” constitute “an invisible hand,” but each describes a hand of rather different shape and texture. Neoclassicals like Marshall, Jevons, Menger, and Clark famously attribute competition’s end prices to a supply-demand-price mechanism, where prices change most often due to fluctuations in the marginal utility of consumers, production rises or falls to meet it, and resources are distributed to capital or labor according to their contribution. For classicals like Ricardo, on the other hand, capitalists mostly compete on their cost-prices and try to keep them as low as possible. Hence, the ultimate determinant of costs (for Ricardo a combination of the minimum subsistence wage and agricultural inputs into agriculture; for Marx, the socially necessary labor time required at society’s current level of technology) will tend to determine prices across the economy. Both theories assume that competition will produce a “correct” price as long as prices aren’t fixed artificially high or low by collusion or government fiat; but they differ wildly in their supposed disciplining mechanism. Only the neoclassicals believe supply and demand determines everything; and while classicals allow for short-term price changes due to their own, much vaguer version of supply and demand, they think prices in the long run will always fluctuate stably and tightly around some determinant rooted in the labor process. Bharadwaj’s Classical Political Economy… (1986) is the definitive statement of the difference between classical and neoclassical price theory; so alien is the latter’s conception of “supply and demand” to the former’s that Bharadwaj uses “supply and demand theories” as a synonym for neoclassical price theory., 45Generally, the politics of classical political economy ran thusly: they tended to be anti-landlord, anti-labor, and pro-capitalist. Landlords tended not to reinvest in expanding the surplus and so were “parasitic”; capitalists, by contrast, did and received a just reward; and workers, while noble, tended to want higher wages that either stifled production by asking for too much surplus or led to overpopulation and famine until these decreased back to minimum subsistence level. But this is a very complicated matter that can’t be dealt with properly here. Smith and Ricardo tended to be optimistic, where Malthus was pessimistic, about the ability of wages to increase in the long run as capitalists grew productivity through their reinvestment into machine processes. Marx, of course, famously threw a wrench into all that by pointing out that, as long as profits and wages existed as separate streams of surplus under capitalist control, accumulation wouldn’t lead to mass prosperity—greater productivity need not mean a bigger wage bill, more automation means more unemployment for workers, etc.

Funnily enough, one could from the very same models and premises derive radically different conclusions about how the system ought to be structured—particularly if one was a part of the workers’ movement. The most famous example46Which is to say, not the only one. Marx was deeply indebted to previous socialist economists whose own work laid the foundations for the system he would assemble in Das Kapital – a fact about which he could be variously transparent and dodgy depending on what was more convenient in the moment, but which his followers of all stripes have almost uniformly suppressed for fear of displacing their master from the center of socialist history. These predecessors included Proudhon, for whose influence see Ian McKay, “Proudhon and Marx” (18 March 2010) on the Anarchist Writers blog; and the English socialist political economists of the 1830s, for whose influence see Esther Lowenthal, The Ricardian Socialists (1911) and J.E. King, “Utopian or scientific? A reconsideration of the Ricardian Socialists,” History of Political Economy 15 (3) (1983): pp. 345–373. But the diligent reader shouldn’t hesitate to take a look at the primary sources themselves, which are often brilliantly written and fascinating in their own right. Some highlights include: Thomas Hodgskin, Labour Defended Against the Claims of Capital; or, the Unproductiveness of Capital Proved with Reference to the Present Combinations amongst Journeymen (1825) and Popular Political Economy(1827); Senex, Letters on Associated Labour(1834), of which a 2005 IWW edition is available on Libcom; Proudhon, What is Property? (1840) and the economic writings collected in Ian McKay (ed.), Property is Theft!: a Pierre-Joseph Proudhon Anthology (2011); and John Gray, The Social System: A Treatise on the Principle of Exchange (1831). It’s an added bonus that reading these works, along with Marx’s commentaries on them in A Contribution to the Critique of Political Economy(1859) and Theories of Surplus Value (1863) – will help you out greatly in understanding what the hell is going on in Das Kapital Volumes I, II, & III. was of course Karl Marx, who in his three-volume economic treatise Das Kapital (1867-1883) took economic principles from Smith and Ricardo to a logical conclusion that refuted the political views of their own creators. Like the classicals he considered hired labor to be the basic and universal input into capitalist production, from which basis he argued (among other things): that capitalism, in order to come about in the first place, had to violently strip workers of the ability to produce their own food and shelter in order to force them into laboring for the wages with which to purchase these back, a process called primitive accumulation; that since workers necessarily produce more value than is then paid back to them in wages (obviously, otherwise why hire them?), the profit of the capitalist is surplus value which they control only because of their ownership of the firm; that capitalists actually like unemployment, since the unemployed are a reserve army of labor that helps them keep wages low and discipline workers through the fear of being fired; that these institutional arrangements led directly to the horrifying sweatshop conditions, child labor, etc of Marx’s own time; that all production is fundamentally social labor, with each workplace producing the ingredients used by another or the money capital used for reinvestment; that capitalists are forced to increase productivity up to a point due to competitive pressure to adopt greater automation, by which means they hope to sniff out relative surplus value via cost savings; and that inevitably, due to this increase in machine production and concomitant decrease in human labor, cost-prices and thus profit rates would tend to fall and unemployment to rise as capitalism developed, provoking a crisis that could only be solved by a socialist revolution. Marx—to whom we owe the name of the classical school in the first place47 Marx was something like the first real historian of economic thought; his Theories of Surplus Value (1863) not only coined the term “classical political economy” to describe the real achievements of Smith and Ricardo, but also laid out the first serious attempt to reconstruct the intellectual development of ideas surrounding surplus generation, growth, trade, and distribution. Granted the limitation of Marx’s sources by what was available in the British Museum Library at the time, it still holds up as an excellent account of most of the thinkers it covers—and, though this is a bit scandalous in some circles, is basically the backbone of our stories about eighteenth- and nineteenth-century economics even today. —presented his work as a “critique of [classical] political economy”; but one could just as easily say he was himself the last and greatest of the classical economists.

Anyway, you can imagine how poorly received Marx’s theories were by the capitalists they exposed and attacked. In fact, it’s directly in response to Marx and other leftists that capitalists and their pet economists began to rebuild the discipline on completely different foundations. After all, much of the point of classical political economy had been to demonstrate that the ascendance of the capitalist class and the promotion of free-market policies ultimately benefited society as a whole; a theory whose premises could be rigorously demonstrated to lead to socialist conclusions was plainly inadequate to this task.48Well, that’s the simple version. Reality is a little more complex – the motivations behind the early neoclassicals’ rejection of most of the classical tradition varied depending on the person in question. It has been pointed out that some early neoclassicals were actually themselves socialists, usually of a reformist Fabian sort; these figures, such as Philip H. Wicksteed, adopted marginalism because their conception of socialism was mostly redistributive (rather than being about worker control), and they wanted to use the new theory’s focus on demand and utility to argue for why a benevolent welfare state should use control of industry to increase the consumption of the masses. This is all very nice, but based on my own studies I happen to agree with the traditional view that the overwhelming drive behind neoclassicalism was politically right-wing, rooted as it was in the attempt to defang socialist arguments rooted in classical political economy’s categories of surplus and class. For more on the marginalist socialists, see Paul Flatau, “Jevons’s One Great Disciple: Wicksteed and the Jevonian Revolution in the Second Generation,” History of Economics Review, 40:1 (2004), 69-107; for a rather grumpy view from a Marxist-Leninist perspective, see John F. Henry, The Making of Neoclassical Economics (1990); and finally, probably the most detailed account of debates between Marxians and marginalists within and outside socialism (edited by the Sraffian economist Ian Steedman) is Socialism and Marginalism in Economics: 1870-1930 (1995).

And so, over the course of the 1870s, a diverse group of bourgeois political economists—William Stanley Jevons in England, Carl Menger in Austria, Léon Walras in Switzerland, John Bates Clark in the US—began to grope their way towards the theoretical framework that would come to be called the neoclassical school. Gone for these thinkers is the surplus; gone are the social classes that draw on it by different means; gone, indeed, is production itself, except as an accident of other entities. Instead, there are scarce resources (for the most part, treated as given or preexisting by the theory) that must somehow be allocated; there are agents, individuals with infinite needs and desires that can be met by those finite resources; and the agents voluntarily engage in exchange, swapping the resources they have for the ones they want via the arbitrary intermediary of money in a market. An economy (no longer political) is well-functioning if it rationally and optimally allocates these resources. Markets allegedly do this in a way that more or less allows actors to maximize their utility,49As with most core neoclassical concepts, utility is a tautology. Joan Robinson put it succinctly in Economic Philosophy (1962): “Utility is a metaphysical concept of impregnable circularity; utility is the quality in commodities that makes individuals want to buy them, and the fact that individuals want to buy commodities shows that they have utility” (p. 48). all through semi-optimized, semi-automated interactions between supply and demand via changing prices. This alleged system—whereby prices fluctuate semi-automatically according to changes in supply or demand, and resources get allocated primarily through this change in price—is called the price mechanism.50 Though this straightforward description of the price mechanism may seem implausible to the novice (or, indeed, the businessman), it is in fact what neoclassicals profess to believe in. Here is Bharadwaj in Themes (1986): in neoclassical theory,

all changes are explained as induced by changes in relative prices and operate through the decisions of individuals who are only ‘quantity-adjusters’; that is, all influences affecting quantities have to be necessarily mediated through relative prices or changes on the market and are outcomes of the atomistic responses of individuals. Thus relative prices acquire the all-powerful role of resource-allocation and the ‘market’ becomes the ‘arena’ of action. (p. 8)

I’ll be diving deeper into the mysteries of the price mechanism in my discussion of Lee’s Post-Keynesian Price Theory, which refutes it definitively.

The neoclassicals’ basic constructs serve to replace those of the classical school piece by piece. Instead of the labor theory of value, they believe in marginal utility or a marginalist theory of value, in which the value of a good or service is determined by the utility that a consumer derives from consuming each additional unit of that good or service. When the forces of supply and demand are in balance, neoclassicals call it equilibrium; prices coordinate production and consumption, with for example customers buying more and producers making less if the price is below the equilibrium price (and vice versa); but such a disjuncture produces shortages or gluts, to which the market can only respond by changing prices; and so prices are said to fluctuate up and down until they reach the equilibrium point that matches supply perfectly to demand (the market-clearing price). Instead of firms owned by capitalists and staffed by wage-laborers producing a surplus allowing for reinvestment, there are only isolated agents who, when they choose to engage in production or consumption, do so at a quantity corresponding strictly to the current price. Instead of social classes who appropriate the surplus by various concrete means, the neoclassicals simply design their production function so that each so-called factor of production (traditionally capital, land, and labor) is paid “according to its contribution,” however one might choose to measure that.51This trick is notoriously flimsy. Here are Bichler & Nitzan on how exactly it is pulled, or at any rate attempted: In his book, The Distribution of Wealth (1899), Clark used this newly found symmetry among the factors of production to offer an alternative theory of distribution…Clark claimed that, under conditions of perfect competition (‘without friction’, in his words), the income of the factors of production is proportionate to their contributions — or more precisely, to their marginal contributions (so that the wage rate is equal to the productive contribution of the last worker added to production, the rent is equal to the contribution of the last hectare of land, and the profit rate is equivalent to the contribution of the last unit of capital)…The marginal productivity theory enabled neoclassicists to finally remove their classical shackles and finish the liberal project of de-politicizing the economy. The classicists, whether radical or liberal, were interested primarily in well-being and distribution. Production was merely a means toward those higher ends. Clark helped reverse this order, making distribution a corollary of production. And indeed, since the turn of the twentieth century, attention has gradually shifted from the causes of income inequality to its ramifications, a subject economists felt they could safely delegate to sociologists and political scientists….Instead of workers, capitalists, rentiers and the state—differentiated entities whose struggles loomed large in the classical canons—the neoclassical landscape is populated by abstract individuals—‘actors’ who can choose to be workers one day, capitalists the next, and voluntarily unemployed the day after. These individuals live not in society as such, but in a special space called the ‘economy’. Their sole preoccupation is to rationally maximize pleasure from consumption and minimize the pain of work. Indeed, society for them is an external and largely irrational sphere which constantly threatens to prevent their ‘economy’ from reaching its collective orgasm of Pareto Optimality. (pp. 69-72) The earliest versions of the production function were always something like this. But the ‘factors,’ in addition to being bullshit in the first place, are something of a moving target. In later versions, such as the Cobb-Douglas Production Function (c. 1927), land was eventually subsumed into the category of “capital” alongside machinery, buildings, and equipment. Only in recent, more specialized versions of the production function was land brought back as a specific factor—a land-back movement, you might say. In all cases, the “factors” and their “marginal contributions” are incoherent and tautological, with no empirical basis, as demonstrated by the Cambridge Capital Controversies. And finally—in their more baroque instantiations, such as Walras’s utopian vision52This is not an exaggeration or a slander: Barber, with infinite politeness, writes in his History (1967): “For Walras rigorous, formal elegance—rather than contact with the practical problems of real life—was the target appropriate for the aim of economists.” Walras himself described his theory as being about the “determination of prices under a hypothetical regime of perfect competition” and justified it as follows: “What physicist would deliberately pick cloudy weather for astronomical observations instead of taking advantage of a cloudless night?” (pp. 198-200). This prefigures the mentality of the later neoclassicals, who confronted with the crisis of the 1930s would come up with the theory of imperfect competition, wherein real life introduces blemishes to what would otherwise be (and still tends towards) a magnificent general equilibrium. Unfortunately, because as Lee demonstrates there is no price mechanism, general equilibrium is so completely orthogonal to reality that Walrasianism is less like the astronomer waiting for a cloudless night to make their observations than it is as if they tried to do so indoors. No wonder that—as discussed in Footnotes 7, 35, and 36—the DSGE models derived from Walras are so useless at making real-world predictions! —the neoclassicals model the entire economy under conditions of perfect competition as one giant auction where buyers meet sellers in any combination they wish, exchanges are publicly announced, and these therefore all take place simultaneously at their market-clearing prices in a so-called general equilibrium.

By the turn of the twentieth century, these ideas had been iterated into something resembling their current shape. Neoclassicalism forms the basis of orthodox economics. In its purest and original form, as described above, it’s a microeconomics, dealing with the behavior of individual agents.53This point can’t be emphasized enough: so-called microeconomics is the theoretical core of the entire neoclassical approach, to which all subsequent additions are essentially alien. The neoclassicals would not for another half-century see any need for anything called macroeconomics, simply generalizing up from the utility-maximizing individuals to Walras’s general equilibrium and calling that a description of the economy operating “without distortions.” The field of so-called macroeconomics was invented in the 1930s by Keynes in response to the failure of neoclassical orthodoxy, and was the first of many desperate neoclassical repairs using alien materials in the face of heterodoxy. More on all this later. The neoclassical orthodoxy was codified by Alfred Marshall in his Principles of Economics (1890), which became something like the school’s Bible. Indeed, it was with Marshall that “political economy” became “economics” in the first place. His motivations for changing the name of the discipline—which, remember, began as blunt advice for princes on how to manage the class system—could not be spelled out more transparently in the book’s opening chapter:

[E]conomics avoids as far as possible the discussion of those exigencies of party organization, and those diplomacies of home and foreign politics of which the statesman is bound to take account in deciding what measures he can propose will bring him nearest to the end that he desires to secure for his country. It aims indeed at helping him to determine not only what that end should be, but also what are the best methods of a broad policy devoted to that end. But it shuns many political issues, which the practical man cannot ignore: and it is therefore a science, pure and applied, rather than a science and an art. And it is better described by the broad term “Economics” than by the narrower term “Political Economy.”54Alfred Marshall, Principles of Economics (1890). The heterodoxy’s assessment of this name switch is generally withering—and deservedly so. “The old ideological disputes of political economy were finally over,” write Bichler & Nitzan in Capital as Power. “From now on, announced Alfred Marshall, we have a new science: the science of economics—complete with both the rigour and suffix of mathematics and physics” (p. 71). Here at last our familiar opponent the economist arrives onto the scene: apolitical, because they’re above all that; but prescribing the correct policies to politicians anyway, because after all they’re the expert; which expertise comes from their mastery of science, eagerly demonstrated through their cargo cultish imitation of physics—right down to the name!

And this just about takes us to the point where Lee’s History begins.

Against the Continuity Thesis

If the neoclassicals followed one road out of classical political economy, that hardly means it was the only path the field could have taken. One might think of neoclassicalism as a kind of church orthodoxy in the profession—but in churches as in academic fields, no priesthood can stamp out all dissent. And so for Lee, there are three types of economists: the mainstream, who stick closely to the dictates of the magisterium; the heretics, who critique the authorities on some points but continue to uphold their basic principles, and so are tolerated to an extent; and the blasphemers, who completely reject the premises of the establishment and strike off in their own truly new direction. It’s these last who alone built upon the original questions of classical political economy rather than abandoning them, developing its research programme to encompass the problems of modern economies; and it’s “not of mainstream economics, but of [this] non-comparable, alternative economics” that Lee is the community historian.55 Lee, History pp. 1-2

They like to call themselves the heterodox schools of economics—little-known alternative paradigms that break with the neoclassicals on fundamental matters of theory and practice. The heterodoxy forms its own independent ecosystem within the field. Professors working within it can only be found at a few colleges, such as the University of Massachusetts Amherst, the New School, and the University of Missouri-Kansas City. They have their own institutions, whether it’s journals (The Journal of Heterodox Economics, Real-World Economics Review, Cambridge Journal of Economics) or organizations (the Union for Radical Political Economists (URPE), the Institute for New Economic Thinking (INET), International Development Economics Associates (IDEAs)). They are almost never cited by neoclassical economists, but are frequently cited and read as far afield as sociology, history, urban studies, anthropology, management studies, and international relations.56This is partly because the purge of heterodox economists from most neoclassical controlled departments has sent them into different disciplines—a situation analogous to the continental philosophers under the despotism of the analytic school in Anglo-American philosophy departments—and partly because journals in those disciplines take a keen interest in the findings and methodologies of one or several of the heterodox schools. A very interesting, if outdated, network analysis of the heterodox economists’ interdisciplinary influence can be found in Bruce Cronin’s “The Diffusion of Heterodox Economics,” The American Journal of Economics and Sociology 69, no. 5 (2010).

Who are these people? Well, there’re a lot of them and it varies. Famously there’s various flavors of Marxian economics,57There is a bizarre folk notion I’ve heard in the socialist movement to the effect that “Marxian” is a kind of academic self-censorship by petit-bourgeois faux-radical academics afraid to call themselves Marxist. I have no idea how this idea started but it’s worth dispelling definitively. “Marxian” in “Marxian economics” denotes an attempt to build upon and expand the models of political economy established in Das Kapital Volumes I-III to create a comprehensive economic theory. It actually took a lot of courage to come out as a Marxian in the 60s, 70s, and 80s. The reason it evolved its own word (rather than just being called “Marxist economics”) is because there are a lot of politically Marxist people running around—that is, social democrats and communists—whose economics is derived almost entirely from non-Marx sources. This disjuncture between the heterodox economic schools and practical political labels is something to generally keep in mind. Your politics is your politics; your economic school is your ontology of how the economy works; and while the two are obviously related, things have gotten sufficiently complex that you cannot just infer one from the other. Hence there are neoclassical economists with avowed Marxist politics, like Mark Weisbrot and Matt Bruenig; at the same time as there are Marxian economists with all sorts of politics, from left-liberals like Andrew Kliman to Leninists like Paul Cockshott to council communists like Paul Mattick, Jr. to anarchists like Wayne Price; or heterodox economists of other schools (Post-Keynesianism, Institutionalism, etc) with Marxist political views, like JW Mason, Steve Keen, or Stephanie Kelton. Fred Lee, with a syndicalist rather than Marxist politics, was otherwise in this last group for much of his career, before arriving at his own new synthesis of several heterodox schools.  from the value-form school to the Uno School of Japan to the Neo-Marxists and Eco-Marxists around Monthly Review, all of whom claim to be building on Marx’s critique of political economy in Das Kapital. There’s Institutionalism, a school founded by Thorstein Veblen and populated by titans like Gunnar Myrdal and John K. Galbraith, which tends to focus on how our evolving legal and cultural institutions shape economic activity in fundamental ways that vary across time and space. There’s Post-Keynesianism, descended from Keynes’s original graduate students like Joan Robinson and Piero Sraffa, which draws out the radical implications of the old man’s theories of money, uncertainty, and effective demand. There’s feminist economists, such as Ester Boserup and Marilyn Waring, who emerged from the critique of neoclassicalism’s patriarchal assumptions and have been instrumental to the creation of welfare economics and modern theories of development and household production. And there’s the school of ecological economics that grew out of work by Nicholas Georgescu-Roegen and the famous Club of Paris, which analyzes the environmental impact and biophysical limits of the economy and serves as the underlying theoretical basis for political movements like degrowth. Among others, of course!58For an excellent overview of the heterodox schools via essays written by representatives of each, see Liliann Fischer et al (eds.), Rethinking Economics: An Introduction to Pluralist Economics (2018). Also be sure, once again, to consult the indispensable History of Economic Thought Website, which lists articles on nearly all the major heterodox schools under its “Schools of Thought” directory.

But such is the gaslighting at the core of the profession that Lee is at pains to demonstrate these schools exist at all. “[M]ost scholars in the history of economics do not believe that heterodox economics has an intellectual history and hence deny that a heterodox economics community existed of which a history can be written,” Lee writes. Such a view asserts that “no theoretical alternatives to neoclassical economic theory existed” in the last century, that all useful “heresies” were simply integrated into neoclassicalism itself, and so it “dismisses the possibility that heretical ideas could evolve into non-neoclassical ones.” This is because according to orthodoxy the entire history of economic thought has simply been leading up to the neoclassical consensus, which is allegedly in full continuity with classical political economy and any other “scientific” predecessor. Hence there’s only good economics and bad economics—and the heterodox schools are either the latter or, more generously, just not economics at all. The famous economist Robert Solow furnishes a typical example of the establishment’s attitude when challenged:

I think that radical economics as it is practiced contains more cant, not less cant; more role-playing, not less role-playing; less facing of the facts, not more facing of the facts, than conventional economics. In short, we neglected radical economics because it is negligible.59Robert M. Solow, Robert L. Heilbroner, & Henry W. Riecken, “Discussion,” The American Economic Review Vol. 61, No. 2, Papers and Proceedings of the Eighty-Third Annual Meeting of the American Economic Association (May, 1971), pp. 63-68. What’s particularly obscene is that Solow made these comments in response to a report to the American Economics Association systematically outlining the censorship, exclusion, and refusal of academic positions to non-neoclassical economists, of precisely the sort Lee’s History is full of. This gives you a sense of the neoclassicals’ feeling of omnipotence over the field.

Lee identifies this approach as having its origins in Marshall’s Principles. He calls it the continuity thesis, and it’s his great enemy in the book. As we’ve already seen, it’s total nonsense. Neoclassical theory clearly exists as a core set of theoretical assumptions—scarce resources, marginal utility, the price mechanism, general equilibrium—which not only do not follow inevitably from the classical school but barely have anything to do with it. Lee goes on to demonstrate that while these core premises were added to, turned into systems of equations, made impermeable to empirical critique by appeal to various notions of distorting “imperfections,” and so on, the core theory has fundamentally remained the same since its formulation in the 1870s.60Table 1.1 (Lee, History p. 3) is a truly remarkable little assemblage, and highly characteristic of the various tables Lee assembles throughout the book. In the face of much gaslighting by neoclassicals to the effect that no such thing as a neoclassical school exists, here Lee has assembled a list of its core concepts (“economics defined as the allocation of scarce resources,” “profit maximization,” “Pareto-efficiency/optimality,” etc) organized under general subject headers (“Demand Side,” “Markets,” “Distribution and General Equilibrium,” etc) as the table’s rows. Then, across its columns, he notes the presence or absence of each concept in American economics textbooks across four time periods (1899-1910, 1911-40, 1941-70, 1971-2002), making sure to jot down both the number of textbooks and what proportion of that era’s total textbooks it appeared in. “Marginal cost: MC = Px / MPx,” for example, appeared in 31 textbooks between 1941 and 1970, 100% of those available in that era. A note at the bottom helpfully adds: “The list of textbooks examined is found in Appendix A.1.” And there indeed they are—all 112. The whole History is set up this way. Meanwhile, the heterodox schools were able to develop models of the economy which relied less and less (or from the start not a fig) on those core neoclassical ideas—whose economy was not even a series of exchanges between isolated parties at all—yet which not only made better predictions than neoclassical ones but began to converge, from rather different starting points, upon a framework that looks suspiciously like a true successor to (and improvement upon) classical political economy.61Lee got his notion that the heterodox schools were converging (an idea that would decisively shape his life’s work) from his mentor Eichner. As the latter put it: I would like to add that the session reinforced my belief that it is possible to develop an alternative to the neo-classical paradigm, that the differences between Marxists, neo-Marxists, Keynesians, post-Keynesians, institutionalists and grant economists are not necessarily irreconcilable. At the same time, however, the development of an alternative paradigm will not be easily accomplished, especially since the members of the various schools insist on emphasizing entirely different types of problems. This tendency to talk past one another was certainly evident in Toronto. Still, the fact that the different groups tend to emphasize different types of problems does not mean that they are in fundamental disagreement with one another. Only if the dialogue among them continues will it be possible to find out for certain one way or the other. (Quoted in Frederic S. Lee, “Alfred S. Eichner, Joan Robinson, and the Founding of Post Keynesian Economics,” Research in the History of Economic Thought and Methodology, Volume 18C, p. 27). But as we’ll see in Part II, it would only be in his final, posthumously published book—Microeconomic Theory—that Lee arrived at his own proposed synthesis of the heterodox schools.

The Class Struggle in Econ

The fragmented, inscrutable, and unnecessarily complex nature of the history of economic thought derives entirely from this battle between the neoclassical and heterodox schools—or more precisely, from the former’s attempt to cover it all up. That’s what’s so delicious about a book like Lee’s History : it’s the inside gossip on how economics developed in the past hundred years, all the stuff the people in charge don’t want you to have heard about.

Because it would be nice to think that this all could have been settled in an open and democratic manner befitting of a proper science: an epic showdown broadcast across the world, each side presenting its arguments systematically before the public and responding directly to their opponents, with the winners honored by posterity like Huxley after his defenses of Darwin in Victorian England. But such a procedure was absolutely not how the neoclassicals won their hegemony. Indeed, once the twentieth century came around, practically no such comprehensive version of this debate was ever really allowed to happen in person or in print.62In the nineteenth century things were far more interesting, though nearly all of this has been forgotten (with the exception of the so-called Transformation Problem, which is largely an irrelevant triviality and a sideshow). For some interesting accounts of debates between classicals, Marxists, neoclassicals, and other factions on value theory from roughly the 1870s to the 1980s, see Ian Steedman (ed.), Socialism and Marginalism in Economics: 1870-1930 (1995); and Ian Steedman (ed.), The Value Controversy (1987). The one time anything like it ever did—the infamous Cambridge Capital Controversy of the 1950s—the neoclassicals got decisively trounced, by their own admission.63The Cambridge Capital Controversy was an extremely arcane but very important debate between the neoclassical economists in Cambridge, Massachusetts and the Post-Keynesian economists in Cambridge, Great Britain over how capital is defined in neoclassical theory. To simplify to the point of distortion for lack of space, the heterodox economists argued that it was defined tautologically, making it impossible to meaningfully calculate within the bounds of the theory and rendering much of the marginalist theory of distribution incoherent. Indeed, Paul Samuelson—an extremely prominent participant on the neoclassical side—more or less admitted as much explicitly. For a Post-Keynesian perspective, see GC Harcourt, “On the Cambridge, England, Critique of the Marginal Productivity Theory of Distribution,” Review of Radical Political Economics (2015), Vol. 47(2), pp. 243-255. But probably the most lucid and easy-to-read account comes from Jonathan Nitzan & Shimshon Bichler, Capital as Power: A Study of Order and Creorder (2009), pp. 77-83. And naturally, nothing within the discipline changed as a result.

Instead of building a better mousetrap than the opposition, the neoclassical school maintained its preeminence through a series of reactionary capitalist-backed campaigns to purge the discipline of anything that didn’t conform to its paradigm. Leveraging their control over funding streams and disciplinary institutions, the neoclassicals employed wrongful terminations, censorship, blacklists, and other dirty tricks to prevent Marxians, Institutionalists, Post-Keynesians, and other dissenters from establishing a foothold. Having begun the twentieth century in an ascendant but contested position, they suffered a major blow in the 1930s; recovered, despite their intellectual bankruptcy, so that by 1945 they dominated Anglo-American economics departments; and ruthlessly defended this position until 1989, when the fall of the USSR gave them a truly global hegemony. All the while they took advantage of every Red Scare and social panic they could, rigged the academic ratings systems to favor their faction, and sided with the most reactionary elements of the business elite to maintain their vaunted position. Above all, they made sure none of this was ever taught, consolidating their victory by writing their opponents out of history.

Lee’s History is a long litany of such cases from around 1900 to 2000, with one group of chapters covering the US and another the UK.64My discussion in this essay will be mostly US-centric. Those interested in Lee’s account of the evolution of neoclassical economics in the UK should read no only the relevant chapters of the History but also “Prologue: Before PPE” and “From Oxford Political Economy to Oxford Economics, 1922-39” in Warren Young & Frederic S. Lee, Oxford Economics and Oxford Economists (1993), pp. 1-25. It’s actually a bit tiresome to read as a result: after a while all the spurious firings, frame-ups, purges, and coups start to blur into one another. But there was no other way of writing the book—most of this history is obscure, and never before had it all been documented in one place. Here’s a taste of a typical sequence:

[F]aculty who underwrote club activities were let go when the club invited unacceptable speakers, such as progressive economist Robert Dunn who spoke on famine in the Soviet Union. In addition, during the Red Scare of 1919-20, universities and colleges, such as Barnard, Wellesley, Radcliffe, Chicago, Yale, Vassar, and Smith, were denounced as hotbeds of Bolshevism…established academics, such as Ross, Commons, and John Dewey were branded parlor reds while others were discharged from their institutions for their political beliefs and writings, because they agreed to speak at a Socialist Party rally, or sympathized with the ideas and agenda of the Industrial Workers of the World or even the Non-Partisan League; trustees and presidents in cooperation with the business community set up spy systems in their universities and colleges to identify the radical, un-American professors and students for dismissal; and a movement was launched to scrutinize economic textbooks for breaches of loyalty. Finally, professors and instructors who questioned the interests of (or were questioned by) powerful business groups were harassed, suspended, dismissed, pressured into resigning; economics departments with too many progressives (as at the University of Washington) were restructured and placed in conservative business schools; and businesses threatened not to donate to universities that retained faculty with radical economic views.65Lee, History p. 31-32.

And here is another, from the postwar period:

The opening salvo came in 1948 when Lorie Tarshis’s introductory textbook The Elements of Economics, was attacked by the business-oriented McCarthyite National Economic Council for providing a Keynesian view of the macro economy and presenting Keynesian pro-government interventionist policies. A letter-writing campaign was also organized to get colleges to ban the use of the textbook in economic courses as well as to have Stanford dismiss Tarshis. The campaign succeeded in destroying the market for the book…The next salvo occurred at the University of Illinois in 1950, when conservative economists…attacked department chair Everett Hagen. The reason for the attack was that they did not like the way he was directing the department and the fact that they were losing students to the younger “Keynesian” economists. The attack spilled onto the young, newly hired “Keynesian” economists, such as Eisner, Leonid Hurwicz, Don Patinkin, and Franco Modigliani, who were branded “pinks” or “reds” by the local press. In 1951, the Texas state legislature called for the firing of [the important Institutionalist economist Clarence E.] Ayres because he argued in front of students that the current hostility towards government was fostered by an uncritical acceptance of the ideology of free enterprise and contributed nothing to an understanding of the development of capitalist society.66 Ibid. p. 38-39.

Now imagine several hundred pages of this sort of thing, all assiduously footnoted, backed up by tables charting the presence and decline of heterodox professors across departments or heterodox ideas across textbooks over the decades, Marxists and Institutionalists and Georgists and Keynesians all getting purged, one case study after another, multiple sources for every assertion—that’s the History, in a nutshell.

But I’m being somewhat unfair. It’s not as dull as all that: the book also contains some rich theoretical insights that help make sense of this long history of suppression. 

Of particular importance is Lee’s theory of knowledge-producing communities. For Lee, intellectual theories are just as much products as tons of steel or mocha frappuccinos—they can be understood to be the end result of a productive process within the economy. But this means that they must somehow acquire certain resources as inputs which they transform into their outputs. Hence, just like the social classes of classical political economy, communities of knowledge-producers must get their hands on a slice of society’s surplus if they’re to reproduce themselves over time and so continue their activities. Because economists are academics, their method for appropriating the surplus is overwhelmingly via the university—which means understanding neoclassical hegemony requires accounting for how they control the flow of money, jobs, and other resources to economists.

With these simple starting points, Lee’s drawn us the outline for a political economy of university life. The History fills in this sketch with sociological detail. The results are delightfully scandalous, and not just to the bosses in charge of econ.

At bottom universities are not about academic freedom, they’re not about open inquiry, they’re not about public service, they’re not about educating the masses—they embody or accomplish none of these except as an accident to their primary function. And that function, when all is said and done, is to draw upon a chunk of society’s surplus and funnel it into various colleges and departments, who then use it to pay scholars so they can research and teach full-time within the parameters of method and quality set by those distributing the cash. Universities medieval and modern, whether under the control of religious clerics or communist parties or capitalist trustees, are united across time and space by this fundamental pattern of organization. From this perspective, it follows rather obviously that the point of establishing such institutions in the first place was to generate particular kinds of people producing certain sorts of approved knowledge, sustaining them so they could do it as a permanent living. To the extent universities remain useful to modern democracies (and it seems to me Lee, for all his ruthless critique, remains rather fond of them), it’s because we too need permanent and reliable funding streams by which to nurture and sustain knowledge-producing communities, for the good of society and perhaps even as a good in itself.

But there’s a dark side to this pretty vision: it follows from the above that the university’s basic priorities, its approved departments, the recruitment and training of its personnel, and therefore what’s allowed to be researched or taught are entirely the product of whoever controls the levers of resource acquisition and distribution. This is the origin of all academic politics—the battle for control over decision-making power in the university, and hence over which research programmes get to perpetuate themselves and which do not.

From an economic point of view, all academic politics reduces to a struggle over the control of funding, the creation of graduate students, the composition of tenure and hiring committees, the editorship of top journals, the quantitative rankings of journals and departments, and the leadership positions of professional associations. These forms of power are all mutually reinforcing. After all, an academic discipline socially reproduces itself generation to generation when professors train grad students who then become professors, all sharing the appropriate methodology. The committees decide who gets hired and who gets the full-time, well-paying, permanent jobs. And the committees’ key metric (besides an assessment of the dissertation) is the ranking of the candidate’s home department and of the journals they’ve been published in or cited by. Rankings are most often the creation of influential individual professors, professional groups like the American Economics Association, or trade publications like US News & World Report influenced by the former. And finally, individual departments’ rankings in particular are (along with enrollments) key to securing their long-term funding—particularly as a way of preventing getting axed when their university faces a budget crunch. The end result is a sort of closed loop: if you control each of these key nodes or even just most of them, you can turn an entire academic discipline into a self-referential and incestuous network of mutual citations, hirings, sinecures, and other kinds of back-scratching by just one highly organized minority faction. And they, of course, can keep anyone else from being able to enter the field.

And this is precisely what the neoclassicals did. As Lee shows in extraordinary detail, they used their control of professional associations, tenure committees, top journals, and even state organizations like the National Science Foundation to deny heterodox economists tenure, prevent them from presenting at major conferences, shut down or preempt their funding streams, and otherwise aggressively marginalize them all through the latter half of the twentieth century across the Anglosphere. This is a story he tells by both following the life-histories of scores of individual economists and tracing the flow of the orthodox and heterodox schools through journals and job placements in dozens of aggregated tables. A particularly controversial claim might get as many as fifteen sources to back it. Lee’s research on how the neoclassicals used and manipulated rankings to control the discipline is particularly original, as far as I can tell, and he shows how this was accomplished by distinct methods in the US and the UK—in the former by rigging the “journal quality index,” in the latter by staffing the semi-governmental “Research Assessment Exercise.”67 Lee, History—for the discussion of American rankings see pp. 43-49 and pp.76-77; for British rankings, see Chapters 8 and 9 (pp. 153-186).

The Battle of Rutgers and Beyond

Lee wasn’t just a historian of these events; he was a participant in and, at moments, a victim of them as well. Nowhere is this better illustrated than in his personal testimony about the Battle of Rutgers—a cheeky name (mine, not Lee’s) for the dramatic events that would occur there.

Rutgers is New Jersey’s premier public university, a major research center, and a key stepping stone for the upwardly mobile members of that state’s vast multi-ethnic working class. It’s a place I’m quite familiar with, what with so many of my family and childhood friends having gone there and my own frequent attendance of its summer classes and dorm parties. And despite the great virtues of its humanities and science programs, it’s just about the last place I’d expect to find a heterodox economist today.

But in the early 1980s things were quite different. Lee’s mentor Eichner, along with his friend and collaborator Jan Kregel, had for some time been trying and failing to organize the emerging US Post-Keynesian scene. Eventually they decided to go for broke and turn Rutgers, where they both taught, into a home base. They were aided by a lucky bureaucratic snafu. “Until 1981, Rutgers University was composed of a number of colleges, including Rutgers College, Douglass College, University College, Cook College, and Livingston College,” Lee writes, “and each college had its own economics department.” Kregel had become chair of one of these little departments (Livingston’s), which alone became their heterodox refuge.68Lee, History p. 89. They also seem to have benefitted from a friendly administrator. “Motivated by the publicity that the University of Massachusetts-Amherst received for establishing a ‘radical’ economics department,” an unnamed Provost at Rutgers “charged [Paul] Davidson to differentiate economics at Rutgers from the mainstream departments”—notably, Lee adds, not without a hint of bile, “such as Princeton.” As a Jersey boy and Princeton alumnus with many Rutgers connections, my hunch reading between the lines here is that the heterodox economists were cleverly able to exploit their university’s deep-seated inferiority complex towards their somewhat overrated Ivy League neighbor two train stops over. (Who exactly made the Provost aware of the “publicity” around UMass Amherst’s little clump of Marxists? Lee doesn’t say.) I suppose to an administrator largely ignorant of such matters it must have looked like a fine way to get the one-up on the Princeton snobs—presumably our Provost didn’t yet realize the hysteria this would cause among Rutgers’s own neoclassicals. At any rate, this Provost seems to have delivered: soon Davidson was able to establish the Journal of Post-Keynesian Economics on campus with “the blessing of the President [of Rutgers],” and “under Davidson’s guidance” Kregel was appointed as chair of Livingston’s economics department in 1977. It was upon this pebble that Eichner sought to build his Institute for Post-Keynesian Study, which despite its name invited economists from across the heterodox schools to study and talk at Rutgers. One young Institutionalist he recruited at the time later recalled Eichner saying that “Rutgers was going to be the most exciting place to study economics in the United States, if not the entire world.”69Frederic S. Lee (ed.), Tributes in Memory of Alfred S. Eichner, p. 33

Lee was an easy recruit. He’d taken classes at the University of Edinburgh from 1977-78 but had been frustrated by the offerings.70Lee left Edinburgh because he was frustrated. The program supposedly had an orientation towards industrial economics. But as he told an URPE interviewer decades later, “That’s what they claimed. Never showed up. That’s why I left.” (17:50) Nevertheless, it hadn’t been time completely wasted. In the same interview Lee notes that he arrived at Rutgers “far, far more generally prepared than any student. Only probably drawback was stats, for econometrics. But since I didn’t believe that there’s randomness in the world, that made it very difficult to take stats—kind of unbelievable, in the early 70s, when randomness was a requirement…But I took my linear algebra, and I caught up on the mathematics that I needed to.” (18:25-19:07) See “Fred Lee” (7 November 2016) on YouTube. At Eichner’s suggestion he settled in at Rutgers from 1979-1983, getting first his Master’s and then his PhD there.

What stands out most of all is the incredible community he found there. Lee isn’t a particularly literary writer—I’d call his style workmanlike and chunky, insisting as it does upon getting the job done by carefully defining and diligently repeating all its core concepts—but even so he’s able to convey with much accuracy the strong interpersonal bonds, defiant attitudes, and bohemian affect that I myself have observed when hanging out among the heterodox economists. It reminds me of nothing less than an artistic or philosophical avant-garde—and in fact I don’t think you can understand these communities without seeing them as precisely this, just for the social sciences. “As a group, they were an eager lot, seeking out Post Keynesian theory wherever it was,” Lee reminisces. He paints a picture of the grad students requesting and self-organizing classes on different topics, diligently attending guest lectures organized by Eichner, publishing journal articles before they’d even finished their graduate degrees,71The professors helped significantly with this. Of course this was all intentionally part of the department’s attempt to generate more heterodox economists, expending time and resources to burnish their brightest students’ credentials and give them the best possible chance of landing a placement at a university that could serve as a new outpost for the dissidents. In his interview with URPE years later (Ibid.), Lee sketches out what this looked like in his case: I took a readings course with Jan Kregel where he had me read in part the correspondence between Harrod and Kregel that had just turned up in Volumes 13 and 14, and asked me to write about it because it dealt with the Oxford Economists Research Group. I did so as the class project, refined it, submitted it to the Oxford Economics Papers that following fall. It got accepted—a publication in a Top 25 Journal. I don’t know of any—I could be wrong—but I don’t know of any heterodox economist at my age at my time who did anything like that. I was lucky. But my point is, I got tremendous advice from an advisor. (22:52-23:56). engaging in seminars that were “lively affairs with hard but friendly questions,” and often going out for dinner afterwards with most of the department’s core professors (“Eichner, Davidson, Shapiro, Naples”) to “a local restaurant called ‘Stuff-Yer-Face’” to have further discussions deep into the night.72Frederic S. Lee, “Alfred S. Eichner, Joan Robinson, and the Founding of Post Keynesian Economics,” Research in the History of Economic Thought and Methodology, Volume 18C, p. 33. Many of the seminar papers presented by “Eichner, Davidson, Kregel, and Shapiro” to these students would later become famous within Post-Keynesian economics. Eichner’s guest lecturers included highly interesting and occasionally quite prestigious heterodox economists, “such as Wassily Leontief, Geoff Hodgson, John Cornwall, Sidney Weintraub, Paolo Sylos-Labini, and John Eatwell.” The students, who included not only Lee himself but also Miles Groves (another Eichner recruit), Steven Gabel, William Milberg, Fernando Carvalho, and Andrea Terzi often went on to become accomplished heterodox economists in their own right. This output is all the more remarkable when you remember that the heterodox milieu at Rutgers only had institutional control for a few years, from roughly 1979 to 1981., 73Stuff Yer Face is still around and recently celebrated its fortieth year. They’re two blocks away from New Brunswick’s NJ Transit station and are, apparently, “famous for our stromboli.”

But all wasn’t well in this little oasis. Throughout this entire period, Rutgers’s neoclassicals (who, you will recall, controlled the rest of the colleges’ economics departments) were practically hysterical about the existence of the Livingston heterodox crew and set out to eliminate them—and before long, they’d have the administrators on their side. In retrospect, perhaps our protagonists should have seen the signs coming earlier: Eichner in particular was targeted in a long campaign of bullying and harassment. Miles Groves (the young Institutionalist recruit from before) later described an occasion where a presentation of Eichner’s before the whole Rutgers economics faculty became a perverse and terrifying struggle session. A neoclassical senior faculty member interrupted the talk to insist on an endless series of “very arcane questions concerning other issues that were not being presented in this paper” whose “clear intent was to break Alfred’s line of reasoning and prevent him from formally presenting his ideas to the Rutgers faculty.” Those present who didn’t have tenure—“who had much to fear”—remained silent throughout the excruciatingly long proceedings. A few even joined in with the senior neoclassical, including one who had “earlier benefitted from Alfred’s recommendation,” and “they began to ridicule Alfred [openly to his face] and refused to permit any true discourse.” Later Groves would learn that Eichner had serious physical trouble climbing up stairs—which is precisely why “the economics department had tried to put his office on the top floor while he wanted a lower level.” “I found this all very disturbing,” Groves writes. “I can still shut my eyes and see the faces, hear what was said, and experience the unsettling realization that our profession was both institutionally corrupt and intellectually bankrupt.”74Frederic S. Lee (ed.), Tributes in Memory of Alfred S. Eichner, pp. 36-40. Groves’s fears were warranted and started early; by contrast, the core organizers seemed quite untroubled. Eichner himself was “an extraordinary optimist” and remained “quite the stoic” (p. 38); and Lee seems to have been deeply naive on the matter (“When I came here I knew things weren’t exactly right, but I listened to the likes of Fred Lee at that time and others and they seem [sic] to think it was a very minor issue,” p. 36). If Grove’s memory is correct, then Rutgers seems to have been an important learning experience for Lee. Never again would he let the neoclassicals catch him off guard—if anything, he spent the rest of his career on a ruthless offensive.

Despite having been viciously attacked by the neoclassicals since before he was even hired, Eichner from almost the moment he arrived began pushing hard for curriculum reform. According to Lee, “he inquired as to why Post Keynesian theory was not part of the theory core of the graduate program,” leading to “a committee being established to examine the core curriculum.” But the committee—which was university-wide and under neoclassical control—“recommended that the theory core remain as it was.” Eichner refused to accept this and continued “pressing the point,” which “contributed to the mounting backlash against the Post Keynesian and other heterodox economists.” 

Then the hammer dropped. In May of 1981, Rutgers “decided to abolish the separate colleges and amalgamate the separate [economics] departments.”75 Anecdotally, it should be noted that—in one editor’s experience—neoclassicals and other vested interests like to sell administrators on the consolidation of separate departments and similar centralizing efforts on the supposed basis of ecumenicalism: don’t worry, the argument goes, it’ll all be one big tent where all the different groups keep doing their own thing—and (to admins’ delight) so much cheaper and more efficiently! Then, of course, they’ll proceed to purge their enemies, leaving heterodox faculty and syllabi nowhere to be found in the new organization.—Eds. Now the neoclassicals saw their chance—and from there, as Lee writes, “the situation began to degenerate rather quickly.” Over the next few years, dissident professors and grad students were picked off one by one. Heterodox events and classes were hidden from newer graduate students, while older ones were outright “told they should not work with Eichner and the other Post Keynesian and heterodox economists.” Eichner was ordered only to teach his undergraduates neoclassical theory and “prevented from teaching an undergraduate course on macrodynamics.” Kregel left Rutgers “after he was told he had to teach accounting courses” and not economics. On and on:

Shapiro and Naples were denied tenure, Beneria left when she found out that she was paid less than comparable male neoclassical economists in the department, Street retired and was not replaced, and Davidson and the JPKE left for the University of Tennessee; and at the same time heterodox graduate students left the program.

By 1987 Eichner was the only one left. And in 1988, he was dead from a massive heart attack at just 50 years old.76Lee, History p. 93-94. For more details on Eichner’s death, see Glenn Fowler, “Alfred S. Eichner Is Dead at 50; Major Post-Keynesian Economist,” New York Times (13 February 1988).

Lee himself escaped to UC Riverside, where he taught until 1984—but this was no great comfort. “Rutgers was not an isolated case,” Lee observed in a separate essay about their defeat. “Throughout the 1980s and into the 1990s, neoclassical economists were purging their graduate programs of heterodox courses, while there was a direct attempt to eliminate the heterodox program at the University of California-Riverside.”77Frederic S. Lee, “Alfred S. Eichner, Joan Robinson, and the Founding of Post Keynesian Economics,” Research in the History of Economic Thought and Methodology, Volume 18C, p. 40, footnote 56. We have a witness there too. “What exactly were the issues that divided the department, neoclassical versus heterodox (with some trying to stay in between)?” wrote the Marxian economist Howard J. Sherman. “The battles were merciless because we were fighting about which paradigm should prevail in four areas: undergraduate program, graduate program, hiring, and promotion.” Neoclassicals refused to budge on any of these. Sherman also describes their refusal to hire heterodox economists as having a racial and sexual tinge.78Howard J. Sherman, “The Making of a Radical Economist,” Review of Radical Political Economics 38(4) (2006), pp. 519—538. He witnessed particularly obscene example of neoclassical discrimination a decade or so before Lee’s time, but it’s worth noting due to its involving the famous left-wing economist Amartya Sen: In the meantime, I had met A.K. Sen and was awed by him. So I suggested him for professor and chair of the department, because I did not like being chair. The dean looked at his impressive vita and said, “He could not possibly be chair at UCR.” I asked why not. He said, “I am not prejudiced, but the local business community would never accept an Indian as chair.” Because there were no affirmative action laws, I gave up. So poor A.K. Sen, who later got the Nobel Prize, never even knew he was discussed at UCR—and had to choose that year between Harvard and Oxford. This gruesome story demonstrates a wider point. The neoclassical economists’ contempt for the heterodoxy is, it seems to me, closely bound up with their unexamined feelings of racial and sexual superiority towards outsiders who are women, queer, or people of color. Remember that it was no less an authority than neoclassical economist Larry Summers, Clinton’s Treasury Secretary and Harvard’s president, who once joked that “the World Bank be encouraging MORE migration of the dirty industries to the LDCs [Least Developed Countries]” because “I’ve always thought that under-populated countries in Africa are vastly UNDER-polluted”; once argued seriously that women are probably less common in scientific fields because on average they’re of middling intelligence compared to the lows and highs achievable by men; and avowedly had a “special connection” to convicted sex trafficker and pedophile Jeffrey Epstein, from whom he solicited some $25 billion in donations to Harvard while he was president and on whose infamous Lolita Express he took a number of rides while he was Treasury Secretary. See Daniel M. Hausman & Michael S. McPherson, Economic Analysis, Moral Philosophy and Public Policy (2006), pp.12-23; Lawrence H. Summers, “Remarks at NBER Conference on Diversifying the Science & Engineering Workforce,” Harvard Office of the President (14 January 2005); Jaquelyn M. Scharnick, “Mogul Donor Gives Harvard More Than Money,” Harvard Crimson (1 May 2003); and “Epstein Flight Logs Released in USA vs. Maxwell”, from USA vs. Ghislaine Maxwell (2020, PDF online). Whether such ideological proclivities seem typical of the profession or merely its “bad apples” I’ll leave for readers to decide by their judgment and experience.78

There’s probably no greater symbol of the total rout of the heterodoxy than one that actually goes unmentioned in the History. In the wake of the New Left and a resulting upsurge in student interest in heterodox economics—of which Lee and all his friends were a part—Harvard’s students and faculty began to demand in the early 1970s that radical faculty be hired by the economics department and their schools of thought be represented in the curriculum. Instead, the few radicals Harvard ever hired were all denied tenure after a short stay, and a last desperate proposal to split the department into two sub-departments (a neoclassical one and a heterodox one) to preserve pluralism was shot down. Neoclassicals, of course, had a majority on all the relevant committees.79See Irwin Collier, “Harvard. Leontief and Galbraith report on conflict within department, 1972” (24 September 2020) and “Harvard. Galbraith’s Proposal to Split the Economics Department, 1973” (20 July 2020) at Economics in the Rear-View Mirror ( We shouldn’t be too surprised that these efforts were crushed with extreme brutality; if there can be said to exist commanding heights of the economics profession, they are in the Harvard Economics department. The radicals in question were mostly Marxists: Herbert Gintis, Tom Weisskopf, Art MacEwan, and Samuel Bowles. It is a very interesting fact that the two big defenders of the pluralistic approach were John K. Galbraith and Wassily Leontief, two of the most important economists of the twentieth century. Leontief, in a letter to Harvard President Derek C. Bok, complains that the “minority” on the Executive Committee “favoring a change comprises mostly senior members of the Department” (that is, himself and Galbraith), while “the majority group consists of the younger mathematical economists” arguing that pluralism “would amount to politicalization of the field and lowering of intellectual standards.” This echoes the general pattern found in Lee’s History: Leontief and Galbraith had formative experiences in the comparatively open 1930s and 1940s, before neoclassical dogmatism had consolidated its iron grip on the profession in the UK and US after World War II. Incidentally, the only heterodox survivor of the Harvard purge was Steven Marglin, largely because he remained in the closet pretending to be a neoclassical and only went heterodox after he got tenure. Marglin is a minor celebrity on Harvard’s campus for his annual introductory course. He gives the class every year in protest against the conventionally bigoted yet famous Econ 101 class taught by Nicholas Gregory Mankiw, a rather loathsome don of the neoclassical school who spent most of his time as an economic advisor to Bush being an apostle of cutting taxes for the rich and outsourcing factory jobs. Marglin’s class explicitly positions itself as a more broad and open-minded alternative, introducing students both to neoclassical and heterodox approaches and critiquing the former in light of the latter. During the Occupy Wall Street protests of 2011, Marglin’s class took on a particularly poignant character when the Occupiers at Harvard staged a mass walk-out from Mankiw’s class into Marglin’s, which became an activist teach-in discussing curriculum reform. Based on what a friend told me who was there at the time, the walk-out left Mankiw’s auditorium practically empty and Marglin’s overflowing. Revenge is a dish best served cold; in my book, they should do this every year until old Mankiw retires out of sheer humiliation. For footage of the Occupy walkout, see “Stephen Marglin Heterodox Economics: Alternatives to Mankiw’s Ideology” on YouTube (10 December 2011).

All of this means that Lee’s History —despite its dull patches and its endless litanies of crimes that sound almost like that one long bit about the murders in Bolaño’s 2666 —must nevertheless be seen as a fighting document. To the bosses at the top of the profession, it was a declaration of war. For his fellow heterodox economists, it was at once a catalog of yesterday’s martyrs and a weapon to be used in tomorrow’s struggle. Because after all, once you’ve read Lee, you have a significantly better sense of what is to be done. You now know, despite all the gaslighting, that there isn’t just one economics—there’s a rich and vibrant set of heterodox traditions that have been ruthlessly suppressed. You know the particular mechanisms by which that repression occurred, so that you can fight back against it in your own university or actively prevent it by struggling over control of the relevant institutional levers yourself. You know the importance of funding streams, journals, and professional associations to socially reproducing a scholarly community, so you can set about creating your own dual versions of these as a base from which to plot the reconquest of the established ones. In a remarkable chapter, Lee even develops a complete alternative to the quantitative ranking systems used to judge journals and departments, proposing an egalitarian system that still assures quality-control while protecting pluralism between different economic schools.80Lee, History Chapter 11 (pp. 207-226). Lee’s proposed ratings system for departments and journals is extremely cool and arises directly from his critiques of the ways neoclassicals took over the discipline. Like them he sees ratings as an incentives system that drives curricular and hiring outcomes; but instead of using it to purge dissenters and consolidate an orthodoxy, Lee proposes designing the ratings so as to encourage pluralism in hiring, contributions to the upkeep of common disciplinary institutions, engaging with theorists from other schools, and making those schools increasingly dependent upon one another so that they build bridges across theoretical divides. He accomplishes this by a number of tricks, for example grouping journals by the theoretical tendencies present in them and rating them based on their “exports” and “imports” to and from journals of other tendencies via mutual citation; or ranking departments cardinally rather than ordinally, i.e. giving them points based on how many boxes they check and sorting them into tiered but internally egalitarian categories (S-tier, A-tier, F-tier, etc) so that potentially all departments could attain to the top tier by improving, instead of creating a simple competitive ranking where each department has their own spot on the list (Departments #1 through #20). It’s worth studying these proposals in detail, especially if you’re a heterodox economist. As I’ll discuss in Part II, these are a sign of how serious Lee was about institution-building as well as theorizing; reportedly, his rankings proposals even helped some heterodox economists get jobs who otherwise might not have.

Lee, however, was not content to merely be a chronicler of the struggle. Nor did he ultimately believe the most important thing was to win the war of position over administrative posts. His eye was on a bigger prize. His historical works were nothing more than the necessary groundwork for his real life’s work: the construction of a completely new and unified heterodox economics. Because if you really want to kill neoclassicalism, you must be able to replace it. So for the next three decades, that replacement is precisely what he set about building.

Blowing Up the Price Mechanism

Some Problems With Supply and Demand

We’ve already looked at the basic elements of neoclassical theory. Now let’s take a deeper dive into the way it’s all supposed to fit together. Only in this way can we understand how the theory crumples in the face of empirical reality, becoming useless as a tool for explaining the world—and why the alternative theory outlined in PKPT is a superior microeconomics in every respect.

How It’s Supposed to Work

Neoclassicalism81Throughout this section, I will be using quotes from Marshall’s Principles to back up my summary, as this early definitive articulation of neoclassical theory is much more clear in its prose about the philosophical commitments and intellectual history motivating the theory than more recent textbooks. However, as Lee demonstrated to the point of nausea in the History, and as your own reading should confirm, the microeconomic core of neoclassicalism (as opposed to the sedimentary accretion of neoclassical repairs grafted onto it) has remained remarkably consistent—a critic might say, static—in the century and a half since its original articulation. The standard introduction for undergraduates is N. Gregory Mankiw, Principles of Microeconomics (2024, 10th ed.); for graduate students it’s Andreu Mas-Colell, Michael H. Whinston, and Jerry R. Green, Microeconomic Theory (1995); and those looking for a good source comparing and contrasting orthodox microeconomics to the (pre-Leesian) heterodoxy should consult Howard J. Sherman et al, Economics: An Introduction to Traditional and Progressive Views (2015, 7th ed), particularly Chapters 26 through 35. is essentially a series of deductions, later expressed in math, from a small number of axioms that were arrived at largely by introspection rather than observation. A few core points about rational human behavior were stipulated to be universally true, and if they were, then everything else followed.82 Marshall himself basically says as much. In describing why “the subject of demand or consumption” has “been somewhat neglected” of late, he justifies his diving into marginal utility from first principles by blaming classical political economy’s supposed overemphasis on costs of production for confusing people and hailing the rise of a new mathematical (read: logical, deductive, and formalized) approach as a model of rigor to emulate. But ultimately, he says, his starting principles are already available to anyone of sound mind: “The common sense of a person who has had a large experience of life will give him more guidance in such a matter than he can gain from subtle economic analyses; and until recently economists said little on the subject, because they really had not much to say that was not the common property of all sensible people.” Marshall, Principles p. 56. So to understand the theory, we must begin by exploring the intuitions underlying the marginalist theory of value.

It’s quite crucial that the neoclassicals are concerned not just with utility but with marginal utility—the utility gained by each additional good consumed. At the bottom of this way of thinking lay an armchair theory of human desire that goes like this: desire is infinite, but individual desires are not, and the best way of thinking about how they’re satisfied is to break the act of consumption into increments and see how many it takes for the thirst to be quenched. It turns out that (so the story goes) because our desire for a product diminishes as consumption increases, there are diminishing returns to the utility gained with each additional unit consumed. For instance, the first sip of a gallon of milk is incredibly satisfying, but by the time you reach the end of the gallon, you probably won’t want much more. Presumably, your desire was decreasing incrementally with each sip. You value the first sip most and the last sip least. If you had to pay for them separately, the first would be most expensive, the last cheapest.83“There is an endless variety of wants, but there is a limit to each separate want. This familiar and fundamental tendency of human nature may be stated in the law of satiable wants or of diminishing utility thus:—The total utility of a thing to anyone (that is, the total pleasure or other benefit it yields him) increases with every increase in his stock of it, but not as fast as his stock increases. If his stock of it increases at a uniform rate the benefit derived from it increases at a diminishing rate. In other words, the additional benefit which a person derives from a given increase of his stock of a thing, diminishes with every increase in the stock that he already has.” Marshall, Principles p. 61.

An intuitive enough concept, for some, but what happens when you translate it into monetary terms?84 Presumably, for the neoclassical, it’s trivial to do this because money is just a veil for barter interactions where agents trade what they have for what they want, not an accounting system and means of payment with its own logic, effects, and implications for how agents acquire resources and reproduce themselves. While it’s certainly not the only reason, this intuition may contribute to how neoclassicals fundamentally misunderstand what prices are actually doing and what they’re for, turning them into a signal telling us how to trade commodities so we match goods to wants, rather than a unit of purchasing power by which to secure biophysical resources we require to meet our goals. Let’s stick with the milk, but switch to thinking about it in gallons, since that’s the unit milk is sold in. We can then ask: if a gallon of milk is $1, how many would you buy? What about at $2? $5? $10? Based on the principle of diminishing returns, we can deduce a law of demand: price follows from utility, utility diminishes with each increment bought, therefore how much milk you buy (the quantity demanded) has an inverse relationship to its price. The higher the price, the less you buy; the lower the price, the more you buy. Presumably one could construct a table listing how many gallons you’d buy at each price, until eventually a price is reached that’s so high you’d buy no milk at all—neoclassicals call this a demand schedule. Graph that table and you’ll get a downward slope representing the decrease in gallons bought as prices go up: the demand curve.85Marshall, Principles p. 62-63. Remember that everyone in neoclassical world is a price taker who reacts to prices by adjusting quantities; so if the market changes prices, people change their buying habits, buying in a quantity appropriate to that price according to the demand schedule. 

Meanwhile, there are those who choose to sell rather than buy. They’ve got the gallons of milk, and they’ll sell them if the price is right. So how many gallons will they sell at $1? $2? $5? $10? It should be no surprise that this also allegedly changes in marginal increments according to a law of supply: the amount of milk they choose to sell (the quantity supplied) has a positive relationship to its price. The higher the price, the more they’ll sell; the lower the price, the less they’ll sell. Once again you could construct a table listing how much you’d sell at each price, until eventually a price is reached that’s so low you’d sell none—a supply schedule. Graph it, and you’ve got an upward slope representing the increase in milk sold as prices go up—a supply curve. Now, supply has one additional wrinkle: unfortunately we don’t live in a world of frictionless exchange, and even a neoclassical has to take into account somehow that you need to first produce goods in to sell them. (Remember, they were trying to get away from classical theory with its classes and its cost-prices in the first place.) Hence, neoclassicals often calculate the supply schedule in relation to what they call marginal cost—the increase in cost that occurs86Allegedly—more on this later. with each additional unit of output produced. Each gallon of milk produced requires more ingredients and workers, which requires more dollars of expense. Marginal cost thus provides a lower bound for the price at which the seller will decide to sell milk. For sellers, too, are price-takers who react to changing prices by adjusting quantities; as prices fluctuate, they will produce at a quantity appropriate to the current price.87 Marshall, Principles pp. 235-237. See also Mankiw, Principles pp. 278-279, p. 296-297.

Then they come together. The neoclassicals prefer to envision this happening in a bizarre auction. The buyer arrives with their demand schedule in their hand, listing the quantities they’ll buy at different prices determined by their marginal utility; the seller arrives with a supply schedule in theirs, listing quantities they’ll sell at different prices determined by their marginal cost; and the price which works for both of them is the point at which their curves intersect, which becomes the equilibrium or market-clearing price that matches the supply of milk perfectly to the demand for it. Obviously this process of haggling isn’t particularly realistic; it symbolizes a process of price discovery where supposedly, by adjusting quantities bought and sold mechanically in response to price changes, buyers and sellers eventually find their way by trial and error towards the equilibrium price. This process of tâtonnement (groping), as Walras calls it, or “higgling and bargaining,” as Marshall calls it, is a metaphor for some sort of procedure that’s probably taking place in some sort of large-scale aggregate of individual transactions—for Marshall across an industry, for Walras across the entire economy.88Marshall, Principles pp. 293-194. How it’s supposed to work in the real world of firms setting prices for consumers is not especially clear. Usually, when pressed, neoclassicals will provide a story whereby firms produce a fictional demand schedule of how much they expect consumers to buy at different prices, compare this to their own supply schedule derived from marginal costs, set a price at their intersection, and fiddle with the demand schedule to change the product’s price until one is discovered at which the market clears.

The result, at any rate, is the pretty intersecting curves of eternal fame. In Marshall’s colorful metaphor, supply and demand “each may be compared to one blade of a pair of scissors. When one blade is held still, and the cutting is effected by moving the other, we may say with careless brevity that the cutting is done by the second; but the statement is not one to be made formally, and defended deliberately.”89Ibid. p. 485. Here, though, there’s good reason to believe Marshall is fudging and hedging. People often tell me they find the story of the supply curve far less convincing than that of the demand curve, and that’s no coincidence. Theoretically, at least for neoclassicals like Marshall, they’re equally important to explaining prices—the two blades of a scissor and all that. But it’s important to note that, historically, the account of how demand works is the deep motivation for the overall shape of neoclassical theory, with changes in consumer preferences driving changes in value, hence in prices, hence in resource-allocation. The supply curve framework was a hasty development after the fact to create a beautifully symmetrical system—and, perhaps, to defray critiques to the effect that marginalism neglected the realities of production. Bharadwaj writes at length about how the early pioneers of neoclassical marginalism—Jevons, Walras, Wicksteed, Böhm-Bawerk—all founded their theories explicitly on a “subjective basis” that was explicitly meant to reject and replace classical labor theories of value. But, Marshall did not approve of such a complete volte face, nor of the acclaimed exclusive reliance on the ‘demand’ side. His was a terse attempt to weave together the basically irreconcilable views of Ricardo and Jevons by positing opposite but independent forces of supply and demand acting symmetrically to determine value in equilibrium…In the process, he too shifted the focus to individual subjectivity.” (Classical Political Economy and the Rise to Dominance of Supply and Demand Theories, p. 27) Today’s standard graduate textbook on neoclassical microeconomics is, without getting into any of this history, in firm agreement: “The most fundamental decision unit of microeconomic theory is the consumer.” (Mas-Colell, Whinston, & Green, Microeconomic Theory, p. 17).

However much reality may tend towards equilibrium, if it exists at all then most real-world economic events disrupt it in some way. This is particularly due to changes on the demand side (because let’s face it Alfred, the blade of the scissors that moves is by far the more important one in your story). Merely moving along the curves, after all, only describes how buyers and sellers adjust their purchasing decisions to price changes. If price remains constant but sales go up or down, that’s different—it’s an absolute change in demand90Every Econ 101 class is bedeviled with wailing and gnashing of teeth due to the confusion spread by neoclassicals’ jargon, which makes “quantity demanded” (the amount people buy at a particular price, i.e. a point along the demand curve) a very different thing to “demand” (a person’s willingness and ability to purchase at any price, i.e. the entire demand curve). The former varies inversely with price, but the latter causes prices to vary directly with its changes. This is unfortunately important to understand for grasping PKPT. You can think of it this way: neoclassicalism predicts raising your prices will lower sales and vice versa; while separately, it predicts that higher sales will lead you to raise your prices, and vice versa. which brings it out of equilibrium with supply. Neoclassicals accommodate this by representing it as a shift in the demand curve. Let’s say you’re selling a book, and a review comes out in a major newspaper saying yours is the greatest novel of all time. Sales shoot up—that’s our best proxy for a change in demand. On our graph, this means the entire demand curve shifts rightwards in proportion to the increased sales. We can see the disequilibrium: you were producing for the old demand at the old price, so there’s now a shortage of books to sell to your larger fandom. However, because of how neoclassicals set up the rules of the game, unless you raise the price of the book, supply won’t increase to meet the new demand. So the price rises along the old supply curve to the new intersection point with the new demand curve; as the price goes up, you respond automatically by producing more books; and so by the end of this shift enough books will finally be available to be sold. Or to put it in less abstract terms: when sales go up, you will supposedly raise your price; as more people buy the book, its price will supposedly become more expensive. This alleged responsiveness of prices to changes in demand, and the subsequent reorganization of production or supply based primarily on such price changes, is what neoclassicals call the price mechanism—it is, they claim, the biggest reason market economies are so efficient.

Modern neoclassicals have moved away from simple stories of how marginal utility behaves as you consume one good, towards more complex stories about how it informs your choosing between two goods. Because quantities bought or sold are said to be a function of price, economists often like to discuss the buying and selling decisions people make in terms of trade-offs of one sort or another they optimize for based on supposed price calculations—individuals are utility maximizers, firms are profit maximizers. On the supply side, for example, whenever you’ve chosen one thing over another (paradigmatically, to use the same resources to produce one good as opposed to another good) opportunity cost is the price you pay for not having made the other choice. Ordinary people use this phrase loosely to talk about regrets and the road not taken, but in neoclassical micro it’s meant in principle to be a specific, knowable amount expressible in prices and quantities that helps you choose correctly.91A simple example from Mankiw: “You win $100 in a basketball pool. You have a choice between spending the money now or putting it away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of spending the $100 now?” (Principles, p. 16) Note that the $5 you’ve lost by not saving in the bank is only calculable because there is a severely limited range of possible choices and each choice results in a clear and knowable financial gain. Even more sophisticated opportunity cost calculations tend to follow a similar pattern. In a world of fundamental uncertainty and Rumsfeldian unknown unknowns, this framework appears to have limited value. It may involve a lot of rationalizing (e.g., limiting choices and assigning price outcomes based on the end choice you already wanted to make), and you very well could simply be unable to grasp anything near the full range of likely options. Similarly, on the demand side, whenever you’ve chosen one thing but are considering another (paradigmatically, when having usually bought one good you want to buy a different one without losing satisfaction), the marginal rate of substitution is how much of one good you’re willing to give up to buy the other while your utility remains constant; it can be calculated by dividing the marginal utility you get from one by the marginal utility you get from the other, assuming you know what those are.92I could go way deeper into the various operationally useless tools you can use to calculate these figures from given values in the word problems of neoclassical textbooks—the production possibilities curve you can use to pretend to know the precise consequences of producing one thing or the other with the same resources, the indifference curve you can use to pretend you’ve justified a substitution in consumables when both options bring you about the same pleasure—but I’ll spare you details because after a certain point I get tired of the cuckoo clock logic.

All this sophisticated talk about prices helping us make optimal choices is probably why some neoclassicals, particularly those attached to the Austrian School,93This is a phrase I know will get me in trouble, but it’s worth fighting for. Conventional wisdom insists that Austrians are a heterodox school opposed to neoclassicalism—Lee even included them in his lists of dissidents, published them, and invited them to the relevant conferences—but a closer look reveals this to be at most a half-truth. The core dogmas of neoclassical microeconomics are marginalism, scarce and given resources, allocation via the supply-demand-price mechanism, methodological individualism, and perfect competition/general equilibrium; of these, the Austrians accept all but the last. Indeed, as we’ve already seen, the founding figures of the Austrian School—Menger, Böhm-Bawerk, etc—contributed to the very invention of nearly all those neoclassical concepts the school still employs! In terms of self-identification, Austrians didn’t even really distinguish themselves from other neoclassicals until the aftermath of the Great Depression, when the neoclassical establishment in the US and UK (in a massive act of neoclassical repair) added certain bastardized elements of Keynesianism to their repertoire under the heading of “macroeconomics,” which Austrians rejected wholesale in favor of neoclassicalism’s original “microeconomic” core. This rejection of Keynes, along with a similar rejection of Walras’s general equilibrium framework in favor of a notion of permanent disequilibrium and individual responses to price changes, is the substantive basis for the Austrians’ claims to be distinct from the neoclassical establishment. A more superficial cultural difference is their dislike of mathematical modeling and preference for logico-deductive reasoning expressed in text (and usually pretty prolix text at that—but I who live in a glass house shouldn’t throw stones). The confusion is compounded by splits within the Austrian camp itself on precisely this question of how to relate to the other neoclassicals. One camp clustered around Hayek is quite friendly to their neoclassical cousins and even sometimes plays with math and general equilibrium type ideas, while another group clustered around Ludwig Von Mises and Hans Hermann-Hoppe insists on a dogmatically pure marginalism (and often has more exotic right-wing politics, such as subscribing to anarcho-capitalism or even biological racism); for an amusing peek into their squabbles, see Robert P. Murphy, “In Defense of the Mises Institute” on the Free Advice blog (31 December 2011). As an outsider with different commitments looking in, I draw my own related but separate distinction between the Bad Austrians (Hayekians, Miseans, and Hermann-Hoppeans alike) who are nothing more than marginalists and thus purely neoclassical; versus the Good Austrians, clustered around Schumpeter, who despite being mostly neoclassicals also invented certain theories of entrepreneurship and creative destruction drawn from the study of real-world business dynamics. These more realistic Schumpeterian theories have some real claim to heterodoxy: after all, they don’t really depend on marginalism or the price mechanism, and they’ve had as much or more influence on the real heterodox schools than on the neoclassicals—including a direct influence on Lee, whose UMKC colleague and Marxist-Leninist interlocutor John F. Henry sometimes “even accused him of being a quasi-Austrian!” for this reason (Tae He Jo [ed.], Tributes in Memory of Frederic S. Lee [2015], p. 9). But with the exception of these few non-neoclassical kernels, I am squarely convinced that all the Austrians’ problems with the Anglo-American establishment can neatly be accounted for as a family dispute within neoclassicalism, making them simply a sub-category (like the New Keynesians or the Chicago School) of the neoclassical orthodoxy. This is indeed how Gonçalo L. Fonseca groups them in the “Schools of Thought” directory and describes them in articles such as “The Austrian School” and “The Marginalist Revolution of 1871-74” on his History of Economic Thought Website, which I regard as definitive in settling the matter. insist upon the idea of price signals—that prices are indexes of scarcity (i.e., of the relative scarcity of supply to demand, within and between goods) and so convey the information that coordinates all economic activity via the price mechanism. As economic actors, we only purchase or produce at quantities corresponding to prices, changing these as prices change; it follows, the story goes, that what prices are for is to convey information about the most rational production or consumption decisions, and without them we wouldn’t know how to effectively allocate our scarce resources. The great theorist of this alleged signal function is Friedrich Hayek, whose extremely famous and well-written essay on the subject bears quoting at length: 

Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to co-ordinate the separate actions of different people in the same way as subjective values help the individual to co-ordinate the parts of his plan. It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is significant that it does not matter—which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of those substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all this without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of visions sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process. [emphasis mine]94Friedrich Hayek, “The Use of Knowledge in Society” in Individualism and Economic Order (1948), pp. 85-86. Refuting Hayek’s argument completely is beyond the scope of this essay, as Lee only puts the pieces fully together in the posthumous Microeconomic Theory, which I’ll be discussing in Part II. However, he gives us most of the key ingredients for doing so in PKPT, so I’ll give a brief sketch of an answer here for the curious. Hayek’s argument consists of two points: that knowledge necessary for economic efficiency is local and decentralized; and that the way this local knowledge is coordinated across the economy is via signals produced by price-changes. The first is undoubtedly true—something like it was the central point of Strange Matters’s editorial “Socialism With An Anarchist Squint” (Issue One, Summer 2022), and it’s the starting principle of all true economic planning. Hayek’s second point is the more crucial, however, and it’s decidedly wrong. As Lee demonstrates in PKPT, there is no lawlike, functional relationship between price and quantity whatsoever, meaning there is and can be no price mechanism by which to produce the signals which for Hayek coordinate economic activity. Which isn’t to say that this activity isn’t coordinated; it is! Lee explains how in Microeconomic Theory, arguing (to make a very long story short) that what coordinates production across the economy is effective demand in the form of orders along the economy’s supply chains, regardless of whether any prices are involved at all, as well as the structurally constrained but far from fully determined decisions of agents in a position to administer the various key institutions of the social provisioning process (including firms, banks, market governance institutions, and the state). We’ll be getting a lot more into what those buzzwords mean, at great length, in Part II.

Hayekians see price signals everywhere because failure to heed them can result only in economic ruin. This is key to the neoclassical account of why the Soviet Union fell. Notwithstanding that it had money and prices or that it lasted for seventy years, the USSR’s distortion of price signals must have been, we’re told, what led it to produce inefficiently. The Baltimore Sun ’sMoscow correspondent Scott Shane reached this conclusion in an amusing manner in the early 90s. Reporting that the longest lines were for shoes, he initially thought the Soviet economy didn’t produce enough of them—in fact, he discovered, “the Soviet Union was the largest producer of shoes in the world.” Shane’s ad hoc explanation leans heavily on price signals:

The problem with shoes, it turned out, was not an absolute shortage. It was a far more subtle malfunction. The comfort, the fit, the design, and the size mix of Soviet shoes were so out of sync with what people needed and wanted that they were willing to stand in line for hours to buy the occasional pair, usually imported, that they liked.

At the root of the dysfunction was the state’s control of information. Prices are information—the information producers need in order to know what and how much to produce. In a market for a product as varied in material and design as footwear, shifting prices are like sensors taped to the skin of a patient in a medical experiment; they [prices] provide a constant flow of information about consumer needs and preferences. When the state controlled information, it deprived producers of information about demand. [emphasis mine]95Scott Shane, Dismantling Utopia: How Information Ended the Soviet Union (1995), p. 77. Note that, again, there is an implicit theory of production decisions responding mechanically to price changes here—the way “producers…know what and how much to produce” is from “prices [that] are information.” Interestingly, despite being a favorite quote of online Hayekian neoclassicals, the core argument is often distorted in citation by non-economists to minimize the specific role of prices in telling people what to produce. So, for example, when this passage was quoted by a political scientist of vaguely liberal persuasion whose research is blandly empirical and rooted in behavioral science, the quote from Shane’s book is reproduced with ellipses cutting out the specific mention of prices, and the analysis following the quotation summarizes it by saying: “Informational inefficiency is the root of the problem. Without any idea as to the size and nature of demand for shoes—information that market competition provides—Soviet policy makers simply had to make educated guesses about how many shoes to manufacture.” See Derek A. Epp, The Structure of Policy Change (2018), p. 141. “Market competition” has replaced “prices” as the source of information. The Soviet economy was undoubtedly informationally inefficient due to its centralization and control over information—but even in a capitalist economy, “the information market competition” provides about demand comes from such elements as demographic surveys, forecasts by marketing departments, pop culture, intuition, and imitation of competitors; this info (not to mention production decisions) has little to nothing to do with prices; and it could in principle just as well be collected by entities other than capitalist firms, with their own goals and ways of reproducing themselves. This slippage anticipates many of Lee’s critiques in PKPT.

Of course, this theory of signaling only really explains anything if the quantities we produce or consume really are a function of price, such that shifts in demand change prices and changing prices produce allocations. If people and prices are up to something different, then whatever information does help coordinate economic activity—the lack of which screwed over the USSR—would have to come from elsewhere.

Our World If It Did

While the tiring exercise we’ve just concluded tries one’s patience, the end result is worthwhile: we now know enough about how neoclassicalism works to anticipate the kind of predictions it’s liable to make about the real world. After all, it’s one thing to draw some curves on paper and quite another to try to predict what’s going to happen in the economy. 

In particular, I want to emphasize four key assumptions that must be true about our world for neoclassical economics to hold up. If neoclassicalism were true, you would expect the following:

Due to the price mechanism—shifts in demand leading to changes in prices, which reallocate supply so it meets the new demand—you’d expect that when sales go up, prices would go up; when sales go down, prices would go down.

Due to the nature of price signals, you’d expect everyone is a price-taker and a quantity-adjuster. 

This means you’d expect buying and selling decisions by agents to be highly sensitive to changes in price.

It also means that you’d expect prices to be arrived at some point during any given transaction itself, and to potentially adjust from transaction to transaction in the process of price discovery.

Due to marginal cost, you’d expect for increased output to result in higher costs per additional unit produced.

So how does it all shake out?

Let’s Build a Better Price Theory

The Going Concern 

Probably the most famous problem with studying complex systems is the question of where to start. Anyone who sets out to carve reality at its joints must first figure out where they’re actually going to stick in the knife. To a certain extent, this decision is arbitrary—complexity means interconnection, and in a system of interdependent parts you can in theory start anywhere and eventually travel everywhere there is to go. But in practice, the choice of starting point can be decisive.96 This is why literally every Marxist professor will begin their lecture on Das Kapital, and every Marxist pundit their thinkpiece, with a paean to how brilliant and farsighted Marx was to begin his inquiry with the commodity, which is “the basic unit of capitalism.” This cliché—which is in roughly the same class as beginning your academic paper with “a specter haunts the world, the specter of my subject-matter”—is all the more irritating for being wrong, or so it seems to me. As a card-carrying Volume II nerd, the reproduction schema seem to furnish a far better basis for understanding capitalism than the metaphysics of equivalence between coats and yards of linen. It’s regrettable to the extreme that Marx didn’t instead begin by thinking through his concept of reproduction (what any society, in any time and place, must do to perpetuate itself over time); then proceed to draw up categories from historical research on how different societies have organized their social reproduction under different modes of production; and only then begin an empirical investigation as to what distinguishes how the capitalist mode and its various classes reproduce themselves, when and why this change occurred, how this manifests itself in different sectors of our society, etc. (Funnily enough, in its rough order and framing this echoes the train of thought in those acclaimed passages of Marx’s German Ideology where he lays out the general groundwork for his “materialist conception of history,” but it mostly doesn’t return in DK.) The motivations underlying this inflammatory opinion of mine should become clear in our later discussion of Lee’s posthumous textbook, Microeconomic Theory. The view from a hill reveals more than that from inside a valley; a well-connected node can take you more places in the network than a lonely peninsula on the periphery with only one link to the rest; all of which is to say that the wrong starting point can give you a misleading picture of overall reality and send you barking up the wrong tree. If you don’t know where you’re going, said the wise baseball player, you might end up somewhere else.

Lee believed you have to start with those institutions through which production, pricing, and all the other main activities of capitalist political economy are actually organized—and that is the firm. Which raises the question: just what is a firm, anyway?

Obviously on a certain level we all know what a company is: most of us spend most of our waking hours working for at least one in order to survive. So far, so Marxist—there’s those who own the means of production and can live off it by commanding surplus value, those who don’t must sell their labor-power in order to survive, and the firm is just a legal vessel by which the capitalists divvy up their ownership of the relevant assets. 

For most socialists, that’s where the story ends. But for Lee, it’s the first important distinction to be made between his theory and Marxian economics. Because as someone with deep Institutionalist roots, he is extremely sensitive to the details of how this mere legal vessel was assembled: the legal and social construction of the firm isn’t just an automatic or epiphenomenal consequence of the class system, but is an active creation of particular class actors in pursuit of their strategic goals—and it can, through its regulation of the productive process and claims upon the surplus, shape the subsequent development of the class system that produced it. Hence, if we’re to really understand capitalist political economy, we need to see how the way capitalists have constructed firms impinges upon their activity.97An important upshot of this Institutionalist perspective on the law is that it significantly complicates vulgar Marxist versions of the base-superstructure distinction, whereby material conditions determine social and cultural outcomes which are a mere epiphenomenon thereof. Ignoring what the correct interpretation of Marx himself is on this subject (I happen to think he pretty clearly meant it as a feedback loop, where the base predominates but is shaped in turn), it suffices to say that the legal construction of the entities through which capitalist accumulation takes place must have a significant impact on the course that accumulation takes, meaning the law is no simple ephemera of material relations but helps at least sometimes to shape them. This point has occasionally been made by Marxists—see for example Alan Stone, “The Place of Law in the Marxian Structure-Superstructure Archetype,” Law & Society Review, Vol. 19, No. 1 (1985), pp. 39-68. But in heterodox economics, it’s the Institutionalists who have made the most of this insight. Of particular importance is Adolph Berle & Gardiner Means’s articulation of the growing divide between ownership and control in the twentieth century in their classic work The Modern Corporation and Private Property (1932). While it’s too much to get into here, their account of how absentee shareholders uninvolved in the business yet expecting returns can get into conflicts with the upper management who control and administer the firm day-to-day is massively important to understanding modern capitalism. (One easy example of how it’s relevant to socialists—if control over production need not at all follow from ownership of the firm, then why should we be assured that “common ownership over the means of production” will abolish the boss-worker relationship or wage labor at all?) For Lee’s discussion, see PKPT, pp. 21-25.

In financial terms, a firm can be thought of as the balance sheet that shows its assets and liabilities—how much it owes in outstanding debt or other payments, and what assets it has to pay these with. As long as the firm has enough assets or more to pay its obligations, it’s in the black and can continue to operate. However, if it gets into the red and stays there for too long, it goes bankrupt and can no longer sustain its operations. That’s what it means when we say somebody went “out of business.”

The balance sheet is what ties the whole firm together, regardless of the people who work there or who owns it. Before anything else, the primary goal of any firm is to perpetuate its own existence as a going concern.98The going concern concept has an interesting history, not all of which has been fully worked out yet. Lee himself seems to get it from Thorstein Veblen, who in turn seems to have adapted it into an economic theory from the practical tools developed by corporate accountants during the revolution in accounting techniques that accompanied the rise of the late nineteenth century’s massive oligopolistic industrial combines. For more on this history, see the dissertation by Lee’s graduate student Erik Nelson Dean, Toward a Heterodox Theory of the Business Enterprise: The Going Concern Model and the US Computer Industry (2013), p. 30, footnote 2; and Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business (1977). Hence it needs to figure out how to obtain the biophysical resources it needs in order to do so.

The concept of a going concern is distinct among productive arrangements for its aspirationally immortal character. There are, for example, terminal ventures that have a set expiration date—say, a long-distance trading mission of the sort that was common in the age of merchant capital. Before the trip people invest varying amounts, resulting in different stakes in the end result and a proportionate cut of the profits. Once the journey is done, the profits are divvied up or the losses swallowed as agreed and the concern comes to a voluntary end as an economic entity.99 This is generalizing somewhat egregiously. In fact, methods of financing long-distance trade missions by merchants vary enormously across geography and historical period. I based this rough sketch on two particular forms I happen to be loosely familiar with, the European commenda and the Middle Eastern qirad, both from the medieval period. A going concern, however, is different—it has no planned end date, and it seeks to exist as long as possible. Even though its future is uncertain and its death is (probably) inevitable, a going concern’s first goal is to continue to survive for as long as it can.

Now, the astute reader may already have noticed that this is rather similar to a living organism. Certainly that’s what Thorstein Veblen thought: in works such as The Theory of the Business Enterprise (1904) and “Why Is Economics Not an Evolutionary Science?” (1898), Veblen—who as the founder of Institutionalism was a big influence on Lee—argued for a Darwinian and evolutionary approach to describing the development of economic institutions. Like biological organisms (but on a shorter time scale), firms must adapt over time to surrounding conditions, changing their internal processes as necessary or being culled. There are even more striking parallels not quite observed by Veblen. After all, a firm’s productive process involves obtaining inputs (various ingredients), putting them through production (a transformative physical process), and thereby turning them into outputs (the final product)—a procedure that creates a continuous flow not terribly dissimilar to the metabolism by which an organism transforms food into waste to keep itself alive. Keep this picture in your head, as it will be of great help in understanding not just PKPT but the entirety of Lee’s oeuvre.100 The similarities cut even deeper than one might suppose from the surface. After all, someone might object that the purpose of a firm’s labor process is to produce a commodity for sale, whereas a metabolism’s purpose is not to produce its waste excrement but to nourish itself. But precisely the opposite is the case for the capitalist firm—as we’re about to see in our discussion of administered prices, it produces commodities only as a means to an end, namely to secure the revenue streams by which it can acquire the resources that help it survive and then pursue its higher goals. Thus the biological organism and the economic going concern aren’t just analogous to each other, such that one is a metaphor for the other—when seen from an input-output point of view they can to a great extent be described by the same math, and it’s in fact possible that they are two special cases of a more general category that encompasses them both. So far as I know no one has done detailed, formal research on this question, and Lee himself only alludes to it. That said, the way he expands the going concern concept to encompass households, the state, and the economy as a whole in his posthumous Microeconomic Theory (as we’ll discuss in Part II) suggests the centrality of this concept to his framework, making the parallel with biological forms a potentially crucial coincidence to investigate in further research. ,101 Arguably, something like the going concern concept is at the heart of all materialism. The French Enlightenment philosopher Julien Offray de La Mettrie scandalized Europe in his essay “Man a Machine” (1748) when he declared that “The human body is a machine which winds its own springs. It is the living image of perpetual movement.” (Notably, he was also one of Marx’s heroes.) This is generally seen as a step down from the dignity of having a soul and a divinely ordained purpose in the cosmic order, but one could just as easily see it as beautiful for how it breaks down the artificial barrier between us and the rest of Nature: that we must depend upon the fruit of other organisms’ life-process as they depend upon the fruit of ours means that we’re united by our ecological relations, a fact which gestures at the fundamental interconnectedness and interdependence of all that exists. It is within these relations and these limits that we all must decide upon our goals, give the law unto ourselves, and in doing so create those selves through our own activity, a process the neuroscientists Humberto Maturana & Francisco Varela call autopoiesis—see Autopoiesis and Cognition: The Realization of the Living (1972). (Notably, in an explicit nod to de La Mettrie and thinkers like him, its original and superior Spanish title was De Maquinas y Seres VivosOn Machines and Living Beings.)

Administered Prices 

With that in mind, how and why does a firm set prices? You can’t answer that question from an armchair. Here, Lee argues, the researcher must consider the practitioner; this is the beginning of wisdom, on price theory as in so many other domains.

Gardiner Means was a practitioner and a researcher: he actually ran the family textile factory for a while before studying economics. The disparity between his experience doing that and what economic theory predicted is what motivated his initial doubts about the neoclassicalism they taught him at Harvard. Later, in the 1930s, he found himself working in the Department of Agriculture under famous crypto-socialist Henry Wallace and was tasked with undertaking large-scale data-collection and statistical studies of price data for the agricultural and manufacturing sectors.

The Oxford Economic Research Group was another major source for PKPT. Established in 1936 at the titular university, the OERG’s mission was to undertake extensive investigations of actual business practices in order to ground economics (at the time thoroughly discredited by the Great Depression) back in real-world facts.102Hubert D. Henderson, the establishment economist and pious liberal who founded the group, describes the motivations underlying the OERG thusly in 1931 (a few years before it came together): The most conspicuous defect of the present state of economics is the lack of adequate contact between the work of theoretical analysis on the one hand and realistic study on the other…The theoretical economist is concerned with the elaboration of a highly complex and abstract logical system…On the other hand, the professional statistician or research institute worker is concerned, properly enough, with the accurate collection, assembly, and presentation of economic facts, and not with their explanation. Clearly, however, the application of the scientific method to economic phenomena must involve something else. It must involve first the attempt to extract tentative generalisations from a patient study of the available facts, secondly a thorough going and scrupulous testing of those tentative generalisations by reference to a wider range of facts, and thirdly the precise formulation of the revised generalisations that emerge from the process…In economics, unfortunately, partly, I think, on account of the philosophical and logical origins of [neoclassical] economic analysis, this essential work is very imperfectly done. Quoted in Warren Young & Frederic S. Lee, Oxford Economics and Oxford Economists (1993), p. 128. It is devastating in the extreme that it was a research programme along such reasonable and scientific lines which led to the body of work Lee uses to refute neoclassicalism; this is to be contrasted with the neoclassicals’ own shoddy deductive methods.102 Its two most important and subsequently famous researchers were Robert Lowe Hall and Charles Johnston Hitch, who were unusually perceptive and diligent about noting the consequences of their empirical inquiries for high theory. 

Innocuous enough, right? So many of Lee’s sources in PKPT are like this: government commissions, business school studies, research by industry groups. What they have in common is that they organize teams of researchers to go around interviewing businessmen about how they went about organizing their firms and setting prices, or at any rate to observe them doing so somehow. If marginalism were an appropriate account of price formation, it would have nothing to fear from such inquiries.

But unfortunately for the neoclassical economists, just about the opposite is the case. Because it turns out that if you actually ask people how their little slice of the economy works—as neoclassical economists before these thinkers simply never had done—you might get unexpected results. What emerges instead is a very different story about the agents at the core of microeconomic activity, one irreconcilable with marginalism. Let’s take a look and see what it tells us.103The basics of the section that follows are discussed repeatedly throughout PKPT, but a particularly clear statement of them can be found on pp. 55-57.

In a modern capitalist economy, firms acquire biophysical resources through money. To the firm, US dollars are basically a promise to let the holder access a certain amount of those biophysical resources. This means that to get the resources I need to maintain operations and continue as a going concern—to keep the lights on, in American parlance—I need to figure out how to get the money with which to buy these. For example, if I run a publishing house and want to get access to the printing presses, designers, writers, editors, offices, and so on that I’ll need to produce books, I need money—because money, obviously, is how I purchase those things. Firms don’t have much choice in any of this; it’s a macro-level feature of how capitalism is structured. And the fact that firms must requisition part of society’s surplus via money-revenues shapes why firms do what they do.

In principle, a going concern can be totally subsidized. For example, a government agency doesn’t usually have to worry about revenue because it has a budget that’s allocated from the central government, and it uses that budget as its revenue stream104 Similarly, one might speak of a concern that has a soft budget constraint—while it’s still trying to reproduce itself over time, some external party (usually the state) is subsidizing it so that it can operate for some time at a loss. These include government agencies, nationalized industries, and firms that are the beneficiary of state subsidies as part of a developmental scheme. Arguably it also includes most of Silicon Valley, with the big venture capitalists as the relevant sugar daddy. For an anti-SBC perspective, see János Kornai, Eric Maskin and Gérard Roland, “Understanding the Soft Budget Constraint,” Journal of Economic Literature Vol. XLI (Dec. 2003) pp. 1095-1136; for a pro-SBC perspective, see Max Jerneck, “When soft budget constraints promote innovation: Kornai meets Schumpeter in Japan,” Industrial and Corporate Change, Volume 29, Issue 6 (Dec. 2020) pp. 1415—1430. But most capitalist firms are instead funded out of revenues that they get through sales. That is, they produce something for sale to the market, and they get revenue from those sales. With these revenues the firms in question pay the overhead and labor costs of the production they just undertook—and hopefully, there is some surplus revenue left over. That surplus, or profit, can then either go back into the firm to buy more machines or hire more workers so as to improve and expand production; be used to give the workers a little raise so they have more decent living standards or work fewer hours (just kidding!); or simply end up in the pockets of the owners. On this last point, too, there’s institutional variation—owners can be direct owners who also participate in management, or they can be absentee owners who, by virtue of owning a stake in the company, have the ability to get some kind of payout through dividends or various other instruments.

Thus we arrive at a provisional answer to our initial question. Why would a firm set prices this way or that way? Because, the businessman will explain (no doubt with a certain exasperation), in order to keep the firm alive, they obviously need to have at least enough money coming in to keep the lights on! Hence, they make an estimate of their total costs, add a certain percentage to that number called a mark-up, and set their prices accordingly.105An interesting aspect of how firms administer their prices is all the unknowns. Everything is a forecast, and all forecasts are wrong. Some costs I’ll have to pay right away, others in the future; but when I’m first starting my publishing company, I simply don’t know what my costs are going to be because I haven’t tried it yet; and even after I get going, all I have to go by are historical costs; yet there’s no guarantee that future costs will look the same or that unanticipated ones won’t emerge. To cope with this high degree of fundamental and irrevocable uncertainty, firms will establish various processes that let them find their footing through a combination of habit-forming and experimentation. Strange Matters furnishes an interesting example: we initially set our subscription prices as a mark-up on what comparable magazines tended to charge in anticipation of our desire to pay writers more than usual—a variant, as you’ll see, of what Lee calls price leadership—but other than this vague inkling we had no idea what our operating costs were going to be nor how many subscription sales we’d be getting month to month. So we guessed—and of course our guesses were wrong, as we discovered when we actually started riding the bicycle. Since then we’ve adjusted our rate of output (articles per month, words per article) accordingly, and for better or worse our ongoing real costs form the historical data we’ll be using to make future decisions (they may prove useless in the face of a big unanticipated change). Our prices, of course, have remained the same since we set them over a year ago. People who have examined this procedure call it all sorts of things—cost-plus pricing, the mark-up theory of prices, normal cost pricing—but the one Lee tends to prefer is the way Means put it: as the theory of administered prices. Administered, that is, because it’s the firm’s administrators106 As Lee puts it: The activities of costing and pricing are aspects of business leadership and hence are carried on within the business enterprise by an individual, such as its owner, or by a committee made up of business administrators or managers drawn from different departments and levels of management. In either case, costing and pricing are activities that are administered by the administrators, which implies that the kind of costing and pricing procedures used within the business enterprise, including how depreciation and normal output or capacity utilization are calculated, are administratively determined. The administratively determined actual selling prices are then administered to the market, hence the name “administered prices.” (PKPT, p. 203) who set the price—not abstract “market forces.”107Broadly speaking—because methods will of course vary—they will tend to split the future up into discrete chunks of calendar time (the next financial quarter, month, week, etc.); try to make a sales forecast for each future period as well as an estimate of their normal rate of output in past periods; try to figure out how many batches of product they need to be putting out continually to meet their forecasted demand for upcoming periods, in what Means calls the flow principle of production; make a cost estimate (also based on historical data about producing at the normal output rate) of the cash it will take to produce this output flow; set a target rate of return—an overall profit goal—at some percentage over this cost; and set the price of individual items so that at the forecasted level of sales they will meet that profit goal. (This is more a logical than a chronological sequence. In big corporations, many of the activities listed in the previous sentence will be taking place simultaneously, each in its own department—sales handling forecasts, operations handling cost estimates, etc—with the final decisions on output targets and pricing needing to be hashed out in cross-departmental Sales & Operations Planning [S&OP] meetings and coordinated by Enterprise Resource Planning [ERP] software.) The price of any given product line will remain the same over what Means calls a pricing period—“a period of calendar time which cover[s] a series of sequential transactions”—which, as he and many others have observed, tends to last for months or even years at a time. Firms can take a while to find a combination of settings for all these levers that works for them, and once they do get into that groove they are extremely hesitant to change—which is just one reason among many why Means and others have observed that prices are extremely stable over time. Lee describes this sequence several times in PKPT, but a particularly clear articulation of it is his final summary in Chapters 11 and 12, pp. 201-232.

So what, then, is a price? You’ll note that in this framework prices aren’t really a signal in the sense neoclassicalism wants them to be; they aren’t telling the firm what or how much to produce, nor are they determining the allocation of resources between firms or from firms to customers. Instead, prices are fundamentally a mark-up over and above an estimate of total costs, which in the first instance—it gets complicated later on—are set at a particular level by the firm to ensure that it can secure the revenue it needs to continue as a going concern.

Now, phenomena like this weren’t totally unknown when Means and the OERG were doing their research—and as we’ll see, neoclassicals usually treated them as an exception to its usual rules. In neoclassical world, certain super-special firms called monopolies can administer their prices—but the rest of us mere mortals (because remember, neoclassicals are barely thinking in terms of firms at all—usually, it’s all vague “agents”) are price-takers who can’t escape the laws of supply and demand. Means himself started along these lines, drawing a distinction between (broadly speaking) small agricultural firms to which marginalism applies (“unconcentrated markets” or “atomized firms,” in his parlance) and large (“concentrated”) manufacturing firms to which it does not.108For this distinction in Means’s work, see Lee, PKPT p. 50, footnote 2. Means has some curious notions about what’s “concentrated” and what’s not, since his “administered sector” includes retail and consumer services markets that were in his day and continue in ours to be chock full of firms as small as any family farmer. Clearly his distinction is trying to come to terms with the way the prices of agricultural and raw materials products will tend to fluctuate more with demand than the rest of the economy—a question which remains open and needs more research from a Leesian point of view, it seems to me. There are, however, good reasons to believe that even these prices are administered, just in a different way (more on this later in the essay).

But the trouble is that administered pricing procedures like the ones I’ve described above are to be found just about everywhere. Far from being the superpower of monopolies, administering prices to market is how a neighborhood barber shop, a corner store bodega, a burger joint, or a small solar panel manufacturer do business as well! Don’t believe me? Go ask them. When the OERG did in their interviews with businessmen, the results were hilarious—and devastating for neoclassical theory: 

Part of the problem…was due to the assumption tacitly made in most economic theorizing that individuals possess all the data they need in order to act rationally, whereas businessmen were describing how they set their prices in face of constant and unforeknowable shifts in market conditions, changes in technological knowledge, financial conditions, and politics. Another aspect of the problem was that the businessman was not familiar with the theoretical points the members of the OERG were interested in. For example, when the businessman explained how prices were set, he always assumed some expected level of output on which to determine costs. Since the description of price-setting did not conform to the marginalist approach to pricing so familiar to the members of the OERG their reply would be: “How do you know that the predetermined level of output will sell at the price based on those costs?” However, because the businessman was in almost all cases unfamiliar with the theoretical basis of the question (i.e. the inter-relationship between price and output as implied by a demand curve), the ensuing discussion resulted in some frustration and bafflement on both sides. The final aspect of the problem was that businessmen were seeing common phenomena in a different light than the members of the OERG. The most important example of this, according to Robert Hall…was that businessmen saw prices as non-market-clearing and not even designed to clear the market, while the [OERG] members saw prices as market-clearing. [emphasis in original] Thus the members of the Group had to “re-see” prices.109Lee, PKPT p. 87.

Means found similar things in his research for the Department of Agriculture—and suffered much criticism, some of it deeply bad-faith, for publishing it. By his later years he had, Lee writes, “completely rejected marginalism.” Means himself wrote:

My own hunch is that the current marginalist theory of business behavior as applied to conditions of imperfect competition will ultimately be put in a museum along with the dodo and the theory of consumer surplus.110Quoted in Lee, PKPT p. 53-54, footnote 3

Some Consequences for Neoclassicalism

Administered prices are an empirically observed phenomenon—even neoclassicals educated enough to know about them don’t deny that. But the more you look at them, the more anomalous they are to ever more aspects of the price-mechanism that marginalists place at the center of their entire theory. And this has a number of vitally important consequences. 

First is the question of timing. Neoclassicalism predicts that agents like firms are price-takers whose prices are dictated to them at the moment of the transaction by the Walrasian auctioneer of the market itself. In our real and imperfect world, this is supposed to manifest itself as a process of price discovery using demand schedules or some other such tool by which to adjust the price continually based on how many people are willing to buy at each price. But prices aren’t set at the moment of transaction at all. Rather, the administered price theorists discovered that “management set its price and administered it to the market for a series of transactions”—prices are set strategically before a single sale has taken place, and tend to remain the same for a very long time. 

Which brings us to the second point: neoclassicalism expects prices to change continually based on changes in demand, but the overwhelming empirical fact across the vast majority of the economy is the remarkable persistence of price stability. Means’s access to government data in the 1930s was crucial to this discovery, but essentially every study that has followed in his wake around the world has found the same result. Remember that for the price mechanism to work as advertised, changes in demand should produce changes in prices: when demand goes up prices go up, when demand goes down prices go down. In reality, the vast majority of the time, prices will simply stay the same regardless of fluctuations in sales. In fact, the very few times Means observed prices adjusting to changes in demand, it acted in the opposite manner to what neoclassical theory predicts—a tendency which, in an amusing fit of puritanism, he dubbed “perverse price changes.”111Lee, PKPT p. 67. Administered price theory’s simple observation that prices are tied to costs of production (not marginal utility) via mark-ups helps explain this troubling stability.

The third anomaly is that any empirical analysis of how real-world firms operate results in these just absolutely intractable problems for the aggregates out of which neoclassicalism has constructed its core theoretical concepts. Or to put it bluntly, nothing adds up the way it has to for neoclassical theory to work. This adding-up problem occurs at several different levels, but for our purposes let’s focus on the marginal cost curve and on firm output. Marginalists want to act as if each additional unit produced of a good has some sort of predictable effect on costs. But beside the fact that their predictions simply don’t come true (more on this later), this basically assumes that all inputs are tied neatly to a single product, such that no ingredient can be used to make more than one thing or firms only ever make one kind of product. None of that is true, of course—the world is full of inputs that can be used to make more than one of a firm’s product lines.112Indeed, on those rare occasions when neoclassicals consider particular firms while making models, they overcome the problem of joint costs by simply acting as if firms are widget factories making only one thing, such that a single curve or mark-up can be drawn up for each one in their model. In a world where firms have multiple product lines, each with their own margins and strategies and business models, this goes far beyond any kind of useful abstraction and becomes purely fantastical. Even heterodox economists interested in profit rates can fall into this trap, creating macroeconomic models interested in aggregated industries which, on closer inspection, calculate an overall profit rate by treating those industries as made up of isolated factories making a single product. That’s why firms lean primarily on—and usually only really have any practical access to—estimates of their average total costs. Once you have a world where your corner bodega can use its bread buns to make either a burger or a sloppy joe (and so on, for all its product lines and all their interrelated joint costs), there’s simply no way of predicting what effect each new unit produced will have on cost. Hence for all practical purposes of industrial planning there’s effectively no such thing as marginal cost—several OERG interviewees, when asked, neither knew what it was nor had any idea how to calculate it.113As Lee puts it, “[T]he evidence obtained from the businessmen did not indicate they used marginal revenue and marginal cost or the price elasticity of demand to set their prices. Rather it indicated ‘that they were thinking in altogether different terms’”—see PKPT, p. 90. The theoretical implications are unambiguous: “Means argued that in the modern corporation the costs of producing a specific good were completely indeterminate from the perspective of neoclassical cost theory because of the prevalence of joint costs and joint utility”—ibid., pp. 28-29 and pp. 205-206, footnote 12.

Finally, when sales change (what neoclassicals call a shift in demand), some things do have to change for the firm as well—but if it’s not prices that move up or down, then what does? Administered price theory has copious data backing up its answer: what changes is production, independent of (indeed, without) any attendant change in price. For example, if a publisher puts out a book that nobody’s buying, they will produce less of it. The workers attached to that particular department may even be laid off, if they stop production altogether; but almost always the price of the book will stay the same. The same goes in the opposite direction—more sales do not result in any price increase. And after all, why would they? This is extremely, trivially obvious from the point of view of the capitalist—“why would I change my price?” I’ve had them ask me, when I suggest they behave like they’re “supposed to”—but the devastating result, from a neoclassical point of view, is that prices not only don’t adjust to demand but don’t need to. Management has more levers at its disposal when making planning decisions than just adjusting prices; if anything, the latter is the last thing they ever wish to do.

So what does all this mean? Add it all up, and you get something that without all this careful research would seem like an unthinkable claim: there is absolutely no regular relationship between variations in demand, supply, and price. Prices simply aren’t functioning as they are supposed to according to marginalist theory—changing when demand shifts, signaling what and how much agents must now buy or produce—because they have completely different purposes instead. The price mechanism that’s supposed to allocate resources in the economy isn’t distorted by imperfections, it isn’t the ideal from which reality diverges—it simply does not exist. There just aren’tmarket-clearing prices, aren’t equilibrium points, aren’t demand curves, aren’t agents who adjust their consumption or production based on changes in prices they receive from elsewhere.114“For a price to be not intended to clear the market implies that the market itself is non-clearable.” See the extended discussion on Lee, PKPT pp. 95-96. As Lee would often put it to students in his iconic slogan: “there is no law-like, functional relationship between price and quantity.”115When I paraphrase these theses of Lee’s, I’m often accused of saying there’s no such thing as supply and demand. This seems to me an overstatement of the theory. Sure, there’s no longer a viable supply-and-demand theory of prices (neoclassicalism with its crossing curves mediated by the price mechanism at their intersection). But one can still speak loosely and relatively of supply in the sense of material inputs and demand in the sense of orders for outputs—the former is whatever’s upstream of you in a supply chain, the latter is whatever’s downstream of you. It’s just that in this world, the real world, prices aren’t constantly shifting signals which isolated people respond to by modulating their production or consumption; supply adjusts to meet demand when firms produce to meet orders, and that adjustment is done not by prices but by the firms’ operational planning and execution. There is no mechanism that adjusts “quantities” automatically, much less one rooted in price; quantities are adjusted manually, to meet any number of possible goals, by the management decisions of specialized cadres like supply chain managers! And with that, there is simply no place for neoclassical economics as a description of the real world. More than once, Lee notes that if companies behaved the way neoclassical theory wants them to, they would go out of business.116For example: “The adoption of any other pricing procedure, such as that found in the marginalist approach, would reduce the chances of the Andrewsian enterprise remaining a going concern” (PKPT, p. 111).

Beyond the Firm, Beyond Survival

What I’ve laid out is just the basic foundation of administered price theory. But of course there’s a whole world beyond the individual firm, just as there’s more a firm wants to do than merely survive. Let’s explore some of these complex possibilities. 

Normally, we think of capitalism as a system of unremitting dog-eat-dog competition. You either eat or you’re eaten—there’s no in-between. To the extent that this notion influences price theory, whether in its neoclassical or Marxian iterations, the basic idea is always that (a.) prices are determined primarily through a process of competition between capitalists; and that (b.) one way or another it’s this competition that keeps prices down.

But one of the most striking observations that all the administered price theorists make at one point or another is that if you actually look at how firms interact, even under capitalism, most capitalists are just as liable to cooperate as they are to compete. And the fact that cooperation is the norm, not the exception, is essential to understanding pricing. 

The most simple and indirect example of this cooperation operates on a principle of Mutually Assured Destruction. After all, think about it: competition can’t by itself drive down prices very far. Try to undercut your opponent’s price, and they’ll try to undercut yours. But should you keep up this game of an eye for an eye and a tooth for a tooth for a few steps too long, both of you will find that you have through the course of your price war driven your prices down below your normal total costs. Now, since the whole and entire point of prices is to be a mark-up over cost that allows the business enterprise to continue as a going concern, you’ve at the very least endangered your profitability—and at worst, both of you have died like foolish young aristocratic gentleman in an early modern duel. In the real world firms know this, which is why price wars are quite rare. All but the most aggressive managers avoid them, and none but the strongest firms can survive them. The fact that firms know their competitors will respond to a change in their own prices produces, ironically, a loose form of cooperation inasmuch as it causes all firms in a market to avoid dramatic price changes. This manner of avoiding price wars also helps enforce price stability in general.117Lee, PKPT pp. 77, 90-92.

A slightly stronger form of cooperation is what Lee calls price leadership. We’ve already discussed how important it is that when a firm first starts out it doesn’t really know its own cost structure, and this creates extreme uncertainty in its operations. One way of smoothing such problems out is to take a peek at a firm that’s already doing what you want to start doing—usually one that has a stable history and a significant amount of market share—looking at their prices, and simply being a copycat. By matching their price, you’ll be able potentially to take some of their market share without inducing a price war; and in addition, you’ll be be able to work backwards from the price to a particular configuration of the production process and an associated cost structure that will allow you to actually sustain selling goods at that price. Or to try, at any rate, if you’re going to remain a going concern. There’s no guarantees.118Theoretically, one way to spur more purchases while avoiding a price war is to undertake a sales promotion of the sort one sees in old-fashioned department stores—25% off, buy now! Means actually recommends this as a way of strategically lowering prices for a short time but then raising them back to their normal level, thus getting some new customers while avoiding a price war (Lee, PKPT p. 57). However, as we’re going to see in the section on PWS Andrews’s theories of competition, customers are habit-forming creatures that aren’t especially responsive to short-term price changes when choosing one product over another (another blow to neoclassicalism), tending instead to become repeat buyers of products that have earned their goodwill. So temporary discounts and promotions, unsurprisingly, rarely move the dial very much on sales. Instead, the appropriate strategy for increasing market share is to grow the firm, reinvest your profits into expansion, and develop economies of scale which allow you to permanently reduce your cost-prices so they’re always lower than the competition—a strategy Walmart, the large oligopolistic firm par excellence, calls “Everyday Low Prices.” This connects directly to the idea of price leadership; as Andrews argues, only firms of a similar size and cost-structure to Walmart will be able to compete on that specific product-line, so that the competitor products’ prices gravitate towards that cost-price. But note that small firms can pursue their own pricing strategies in the wake of price leadership that can produce their own successes, or at least maintain their survival. In this magazine’s recent contribution to the proud tradition of pricing studies, our reporter found that bodegas and other small firms selling similar products to Walmart but unable to compete due to their more expensive cost-structures would often engage in “Walmart-plus pricing,” simply applying a fixed percentage mark-up to Walmart’s price and making that their own. This works well enough to keep small producers in business, particularly in cities. See Alex Vuocolo, “Price Pressures” in Strange Matters (4 October 2022).

But cooperation between firms can and often does assume a much more explicit character. And while anti-trust law does forbid the most explicit forms of trusts and cartels, plenty of collective price-setting institutions can exist comfortably within our current legal framework. Firms will, for example, establish informal social networks, industry conferences, and even formally incorporated trade associations that exchange information and best practices for particular productive processes, share technologies, create industry standards, cooperate on research, fund common-pool resources, and even self-regulate to determine a common notion of “fair prices,” perhaps finding ways to punish those firms that don’t hold to the agreement. Meanwhile, as the workers’ movement becomes more powerful within an industry, its members will self-organize into trade unions that demand wages be raised to a level that allows for a decent standard of living. As one administered price theory points out, “unions conducted a scheme of administered prices, that is wage rates, and thus were price administrators as well.”119Lee, PKPT p. 76, footnote 11. And finally, when for whatever reason, whether out of a desire to finance a war or to create a welfare state, a government makes it its business to make sure that a certain industrial price is at a certain level, it can take direct and indirect steps to legally regulate them or even set outright price controls —as was done in the US, to famous success, during World War II.120For more on price controls during World War II, you should get it from the horse’s mouth: John K. Galbraith, whose job was price-fixing for the Office of Price Administration during the War, wrote the definitive account in A Theory of Price Control (1952). For economic planning during the war more generally, see Sam Levey, “How They Paid for the War” in Strange Matters(27 January 2023).

When taken together, all these examples mean that not only are all prices administered but also that the larger context in which those administrative decisions are made—indeed, the very distribution of decision-making power over who gets to administer which price and why is determined by socially constructed, evolving, and above all contested social institutions. This idea is called market governance, and it will be very important to all of Lee’s subsequent theories.121Lee, PKPT pp. 65, 90-92.

Even an individual firm has a far greater range of autonomy than my descriptions up to this point may have led you to believe. Yes, of course there’s a survival constraint: the firm must at the very least recoup its costs of production. But once it’s done that, once it’s survived as a going concern for a while and generated a surplus that it can reinvest—at that point, our firm has got choices. 

Lee describes a situation that’s almost like Maslow’s Hierarchy of Needs: once basic survival is no longer an issue, the question becomes one of self-actualization. A firm at this stage of development can choose to adopt higher goals. And what’s more radical from a theoretical point of view, because pricing decisions are subordinate to corporate strategy, this will result in what Lee calls strategic pricing. This means that those in charge of the firm can choose to pursue any one of a number of possible strategies, none of which are predetermined by some imperative given from without—and since their pricing decision is downstream of this overall strategy, that means prices can be set according to any number of mutually exclusive criteria and logics. 

The upshot of this might be tough for pamphleteering socialists and capitalist bootlickers alike to swallow: according to Lee, capitalist firms are not profit-maximizers. Certainly they want profits—first of all to meet their survival constraint, and second of all to expand their surplus and pay their shareholders. But depending on the goals of the people making the decisions, profit may be an intermediate goal on the way to some other end goal, or it may be put aside entirely in the short term in order to accomplish some other goal in the long term. Some examples of strategic pricing include lowering pricing in the attempt to increase market share, particularly when entering a new market for the first time, and running one product line at a loss while subsidizing it with another. It also arguably includes any number of situations that Lee doesn’t himself get into, such as the different competitive strategies that firms can adopt (some of which can allow small and medium sized firms to coexist alongside large ones in the same industry), or the principles of core competency regulating corporate decisions on vertical integration vs. alliances as well as pricing strategy.122Within the business school literature, the great theorist of strategic pricing is Michael E. Porter, whose Competitive Strategy: Techniques for Analyzing Industries and Competitors (1980) is part of much MBA commonsense and echoes Lee. Similar insights are to be found in standard supply chain management literature, such as the official learning modules of the APICS exams administered by the Association for Supply Chain Management. For these sources, capitalist firms may compete purely on who has the lowest cost-price; but they may also adopt a differentiation strategy, whereby a higher-quality or more ethical product justifies a premium mark-up; or focus on a specific market segment, whether based on income or other demographic factors, which may be willing to pay more to have its particular needs met; among many others. The notion of core competency (coined in C.K. Prahalad & Gary Hamel, “The Core Competence of the Corporation,” Harvard Business Review [May-June 1990]) is a heuristic by which firms decide whether to directly engage in some operation from within the company (vertical integration) or instead outsource it to a long-term outside business partner as part of a larger alliance (vertical strategic alliance), based on whether it’s an operation the firm is or wants to be the best at. Hence a car company might outsource its accounting, its marketing, or even its parts manufacturing to long-term partners who meet its quality and cost requirements, in order to focus on design and final assembly. Some would of course argue that the capitalist firm, whatever it does, must maximize profits in the long run or it will lose to those that do. But in specific operational terms, this doesn’t mean very much really. Even if a firm sets out to “maximize shareholder value,” as the old boilerplate goes, the fact is that they can’t. In a complex world of constantly shifting situations, there’s no real way to guarantee an optimally profitable course of action because you simply don’t know what you don’t know; and furthermore, in such a world of fundamental uncertainty, achieving the only real metric of success—remaining a going concern with a growing surplus—may very well require pursuing precisely those various and sundry activities of which a simple optimizer of the economists’ imagination would simply be incapable.

Oligopolistic Competition

Monopoly Theories as Neoclassical Repair

The dominant tendency of the twentieth-century history of economic thought is to handle the sorts of observations that Lee has been describing throughout PKPT rather badly. Generally, the move will be to think of neoclassicalism as applying to most cases and for any anomaly the researcher encounters to be framed as being the result of “imperfections.” Such theorists will say that supply and demand holds under normal conditions, where small firms are engaged in a highly competitive environment against one another, but that it all falls apart the instant you have monopoly. 

A monopoly is a big, bad firm that destroys the perfection of the market. The usual way in which it’s said to be big is that it’s the only firm on the market for some product. This frees it from the constraints of competition and therefore allows it by one means or another to set whatever price it wants. And it’s bad because having acquired this superpower—that is, the ability to administer its own prices—it uses that pricing power to undercut its competitors or suppliers and gouge its consumers.123The contradictory nature of these complaints shouldn’t go without comment: some of them involve the price being unjustly high and so squeezing the consumer, and some of them involve the price being so low it annihilates the small producer. Theoretically, these can be reconciled through some sort of developmental story where a monopoly, say, begins by undercutting prices, and then having eliminated all competition is able to gouge consumers. This is even a business strategy popular in Silicon Valley. Whether it works in the long run (at least without additional cooperation between large competing firms) is another story, particularly given the fact that monopolies (as we’ll see in a moment) don’t quite exist the way they’d need to for this to be the case.

Frameworks like these, which I (and not Lee) call Monopoly Theories, are quite common. It’s one of the rare sets of ideas that shows up across both neoclassical and heterodox schools of economics. While elements of Monopoly Theory go back to the late nineteenth century, for our purposes there are two major variants within this family of thought, both from the twentieth. 

The first is Joan Robinson’s theory of imperfect competition. As the name suggests, it’s derived from Marshallian and Walrasian theories—and this despite the fact that Joan Robinson is a heterodox economist. (She was young and foolish, back then.) The basic idea is that the Walrasian auctioneer and the general equilibrium of market-clearing prices only exists in a world of perfect competition. But unlike Walras’s utopia, our world has agitating trade unions, meddling governments, and above all monopolies with pricing power. Hence, the theory of imperfect competition purports to describe what supply and demand look like and how they operate in a world with these distortions and market failures. While Robinson herself would move away from this whole framework,124Geoff Harcourt & John King, “Talking About Joan Robinson: Geoff Harcourt in Conversation With John King,” Review of Social Economy, Vol. 53, No. 1 (SPRING 1995), pp. 31-64. it’s been integrated almost wholesale into the basic textbooks of neoclassical microeconomics to this day.

The other main variant of Monopoly Theory is the Neo-Marxist or Monopoly Capital School within Marxian economics, which was founded by Paul Baran and Paul Sweezy in the 1950s and 1960s. Building on predecessors within Marxism like Hilferding, Bukharin, and Lenin who saw an overall trend toward the consolidation of large capitalist monopolies as driving global imperialism, Baran & Sweezy articulated a highly original theory in which such monopolies had by the postwar period led to the rise of a state-regulated capitalism that had attenuated its inherent tendencies to crisis through Keynesian investment and full employment policy.125Interestingly, Baran & Sweezey’s Neo-Marxism used very little of the core economic model in Das Kapital—indeed, it outright rejected a great deal of it on the theory that it accurately described a phase of “competitive capitalism” that had since passed, and that the then-current phase of “monopoly” or state capitalism had new laws that required their own models to be understood. Hence they rejected Marx’s tendency of the rate of profits to fall and its resulting crisis theory, for example. Instead, their model is an eclectic mix of some vestigial Marxian/classical concepts (particularly, albeit loosely, the surplus), Leninist geopolitical commitments (pro-USSR, pro-Cuba, anti-US), Keynesian analysis of effective demand and full employment, and, unfortunately, a great deal of neoclassical nonsense about the price mechanism. The pair each brought different knowledge bases and biases to the table—Baran was from a Russian Menshevik family and had personally worked with Hilferding and the Frankfurt School sociologists, hence his deeper roots in classical-Marxian political economy; Sweezey was the princely son of a JP Morgan executive who had studied under and debated Schumpeter at Harvard, hence his being more firmly rooted in the neoclassical school and more up-to-date on the controversies following the Keynesian revolution. The underlying intention of Neo-Marxism was pretty clearly to retain what they saw as the core of Marxian economic analysis while updating it in light of modern scientific advances. As I see it, to the extent this helped integrate Keynesianism and the midcentury tendency to state planning into a Marxian framework it succeeded; to the extent that it treated pseudoscientific neoclassical concepts as “advances” from Das Kapital, it failed; it produced or contributed to certain interesting later developments, such as the dependency theory of imperialism, the world-systems core-periphery model, and the ecological interpretation of Marx via his supposed concept of metabolic rift; yet it was both too reverent and too disloyal to Marx, discarding some parts of the Das Kapital model that still worked while dishonestly shoehorning alien concepts into it and acting like these fit naturally into the sacred text (because no matter how wrong he is, Marx must remain the center of the socialist universe); and so, as far as intellectual history goes, its hedging and obfuscation significantly muddied the waters by making it unclear to most readers how Marxian vs. non-Marxian theories actually compare, where one begins and the other ends, and how they fit together or don’t. This last point is unfortunate, since it cuts against the main virtue which allowed the Monthly Review school to make the many scientific advances they did: namely, the intuition, however much it was later abandoned under pressure, that heterodox economics had a history before Marx’s birth and did not cease after his death. That’s something which sets them apart from, for example, the dogmatic value-form school now in vogue among online Marxists and other radicals. For the core theory, see Paul Baran & Paul Sweezy, Monopoly Capital: An Essay on the American Economic and Social Order (1966); for developments over time, see the back-issues, obituaries, and anniversary/summary articles of Monthly Review (1949-present); and for the relationship of Sweezy to Schumpeter and Harvard, see John Bellamy Foster & Paul Sweezy, “The Laws of Capitalism” in Monthly Review (1 May 2011) Such theories are most often used to demonstrate the inherent connections between the welfare state and the military industrial complex, as well as how rich industrial countries can only get rich through suppressing the development of poor peripheral countries whose cheap raw materials feed their industries.

These theories developed together, out of discussions straddling the orthodoxy and the heterodoxy over controversies such as that of the kinked demand curve.126 Remember that, under “typical” conditions of perfect competition, neoclassical economics assumes firms experience a uniform price elasticity of demand, meaning that no matter how large a quantity of their product is demanded, the price they must take (or make) will vary linearly—the demand curve as a downward trending line. But confronted with PKPT’s favorite anomaly of price stability (“sticky prices,” in neoclassical parlance), economists working within a marginalist framework tried to modify demand curves to accommodate the data rather than throwing them out entirely. And so some of them asked: what if the price elasticity of demand was segmented into areas of different elasticity? This would result in multiple differing slopes of price relative to quantity along the curve, with a transition point between them looking like a sharp angle or a curved bump—hence, a “kinked” demand curve. Kinked curve models appeared in rapid succession in the 1930s, having been developed totally separately by Joan Robinson of the Keynes circle at Cambridge, Hall & Hitch of the OERG, and Paul Sweezy of the future Monopoly Capital School. Funnily enough, despite having been developed by heterodox economists, these models are all an attempt to explain price stability by means of a fundamentally marginalist account of imperfect (because monopolistic or oligopolistic) competition. They do so by very different ontological means—i.e., where the kink in the curve has very different real-world causes—of varying degrees of realism: Sweezy’s kinked curve, the most well-known and the least realistic, has to do with oligopolistic firms making demand schedules based on simplistic predictions about how their price changes will cause price changes by their equally oligopolistic competitors and how these in turn will marginally affect consumer demand; Hall & Hitch’s kinked curve has to do with translating a realistic story about mark-ups over total costs into marginalism, and saying it applies only to oligopolistic firms; and Robinson’s lay somewhere in the middle of the previous two. See J.J. Spengler, “Kinked Demand Curves: By Whom First Used?”, Southern Economic Journal Vol. 32, No. 1, Part 1 (Jul., 1965), pp. 81-84. These are all transitional models by people whose training was marginalist but who needed to account for anomalies in observable reality, and so attempted a neoclassical repair; several of them would move decidedly away from this entire framework in subsequent years; and in light of PKPT we can see it as a developmental step in the direction of a totally non-marginalist theory. Hall & Hitch burnish a perfect case in point: PWS Andrews, also of the OERG, built on the qualitative research underlying their kinked curve while throwing out the reconciliation with marginalism entirely and thus engaging with the full complexities of oligopoly. But until then, the OERG simply went on teaching marginalism to undergraduates while abandoning it entirely in their study of the real world. As Andrews himself put it: We [in the OERG] were more than content with Hall’s and Hitch’s kinked demand curve. Now since this led to the conclusion that business men would accept any level of prices once established, the curious thing is that it involved the abandonment of marginal analysis. But it did not look like that. The causes for the abandonment were expressed in marginal terms—the indeterminacy of marginal revenue—which was satisfactory in so far as we thought it explained by business men did not pay much attention to marginal revenue-elasticity calculations. In our teaching, therefore, it was possible to proceed quite smoothly through all the maze of pricing theory until we came to pricing in practice which was dealt with on a factual basis and with the quite [sic] abandonment of our tools—the marginal analysis explained why they should be blunted, and we and our pupils were satisfied with a denouement which left our marginal edifice untouched for examination purposes. Cited in PKPT p. 95, footnote 9. Once again, as if it needs any more illustration, we can observe how the parroting of neoclassical pieties and the presentation of results in a way that minimizes impact on the core theory have made an incomprehensible muddle of the intellectual history of the field. But Lee also thinks that both variants actually have their origins in the same source: namely, the Polish Marxian and Post-Keynesian economists Michał Kalecki.127127. Incidentally, his name is pronounced “Kuh-LEHS-kee,” with an -s, not the way it looks when Anglicized. This knowledge will save you from being obnoxiously corrected by pedants over craft beer at your next left-wing cookout.127 Kalecki was a highly influential heterodox economist who can be said to have invented a version of theory of effective demand separately and slightly earlier than Keynes. He was himself greatly influenced by the reproduction schema in Volume Two of Marx’s Das Kapital, which was of great use to him in making various innovations in macroeconomics—though unfortunately, as Lee demonstrates, he was also deeply influenced by marginalist microeconomics.

Thus, although Kalecki is rightfully heralded for various highly virtuous achievements—including the Kalecki-Levy profits equation, certain important insights into the political economy of full employment policy, and even a limited but contradictory discussion of a version of mark-up pricing128For more on the famous profits equation, see Steve Mann & John Michael Colón, “Fast Cars and Fiat Money” in Strange Matters Issue One (Summer 2022), footnote 16. For Kalecki’s highly readable treatment of the political economy of full employment, see Michał Kalecki, “Political Aspects of Full Employment” in Political Quarterly 14/4 (1943), pp. 322-31. —he comes in for a serious drubbing by Lee, because all his major macro models are tainted by a “degrees of monopoly” story whereby the neoclassical price mechanism is the norm, and as a firm or the whole economy grow more and more monopolistic, marginalism applies less and less. Thus, for Lee, Kalecki becomes the great mascot for Monopoly Theory and its numerous flaws. Ironically, it’s precisely those situations which Kalecki describes as exceptions or aberrations that he’s most realistic about, whereas anytime he falls back on the “normal” rules of the game he becomes wildly fantastical.129Lee’s discussions of Kalecki are in Chapters 7 through 10 of PKPT.

By now, of course, you should know enough to understand the motivation behind these monopoly theories. In the face of the anomalies identified by the administered price theorists, such neoclassical repairs are necessary in order to integrate the contradictory data into the model without actually changing or even questioning any fundamental aspect of how the model works—even when, as we’ve seen, a more careful appreciation of the case studies underlying administered price theory shows that the basic mechanisms of supply-and-demand pricing are no longer tenable in their wake. 

However, this still leaves some open questions. If all prices really are administered, then what actually is the relationship between firm size and prices? Are there really any firms that can’t be said to have competitors? What exactly is up with the sorts of companies that the monopoly theorists are so worried about? And how do they work? It would take the work of another theorist to sort these all out within a truly heterodox framework.

Andrews’s Oligopolistic Competition 

PWS Andrews was an upwardly mobile working-class kid who became an economist and joined the OERG in the late 1930s. The habits of empirical, qualitative, and statistical research he picked up from this milieu would come seriously in handy for his career. By the mid-1940s, he was a key player in a number of well-funded projects investigating what economic reconstruction in Britain should look like after the war. This included a study of large enterprises in the rayon and shoe industries. A great deal of what was at stake in such research was whether or to what extent big industry should be nationalized, regulated, or broken up as part of an attempt to increase economic efficiency or build a welfare state.130Lee discusses Andrews in Chapters 5 and 6 of PKPT. For additional resources on his life and work, see Juli Irving, P.W.S. Andrews and the Unsuccessful Revolution (1978), a PhD thesis for the Department of Economics, University of Wollongong; and PWS Andrews, Frederic S Lee (ed.), & Peter E. Earl (ed.), The Economics of Competitive Enterprise: Selected Essays of PWS Andrews (1993), especially the preface by Lee.

Funnily enough, Andrews’s own prejudices were pro-capitalist—he admired little entrepreneurs and big businessmen alike, and distrusted state control of enterprise. Yet he was also an intellectually honest OERGer who grew more and more convinced that neoclassical theory was no longer tenable in the face of evidence, and that Monopoly Theories like those of Kalecki, Robinson, and Sweezy were hasty repairs of a faulty theory after the fact rather than grounded in what was right in front of the researcher. His own extensive studies not only of individual firms but whole industries confirmed these suspicions.131Hence, from the start, socialists who noticed his work took a great interest in it: the radical Labour politician Margaret Cole made a speech in 1946 “in which she mentioned the possibility of nationalizing the [boot and shoe] industry based on Andrews’s research,” resulting in the company sponsoring that research retracting their data so the report was left unfinished. Lee, PKPTp. 101.

The result is a theory that not only confirms the insights of the administered price theorists but embodies a robust, totally non-marginalist theory of competition grounded in the real world. Its basic components are summed up nicely by Lee here:

[I]t appeared to Andrews, in light of his data, that goodwill was the decisive factor which determined an enterprise’s share of market sales, while the level of national income [effective demand] determined its levels of sales. In addition, he became convinced by his analysis of the data that competitive markets need not be defined in terms of the competition of enterprises producing identical products, that oligopoly was the normal characterization of markets, and that oligopolistic markets were competitive irrespective of the number of enterprises in them.132Ibid. p. 102.

Let’s break this down step by step.

First of all, Andrews’s firms are going concerns that make mark-ups over their total costs to reproduce themselves, just like those of the American administered price theorists. He calls his theory “normal cost pricing,” but it’s the same thing for all intents and purposes. Andrews also has notions of market governance such as price leaders and trade associations. His biggest question, initially, has to do with discovering the relationship between firm size and prices.133Ibid. pp. 112-115.

What he finds is a similar enough result to what Sraffa did in a famous essay on Marshall—cost curves are declining or flat. Or, to put it in non-marginalist terms, the general rule in the actually existing economy is what neoclassicalism regards as the exception: the greater efficiency and lower costs that come with scale. The general pattern Andrews observed was that the more firms produce a set of product lines, the better they get at it and the lower their costs; these more efficient “managerial techniques” are passed on to each new additional plant segment or plant as management expands production; yet more production and sales means more profit at existing mark-ups; hence, as output expands and more profits are reinvested in the business to increase efficiency further, the cost decreases even as (indeed, because) output increases, first dramatically and then eventually leveling off. Nor is this a one-time benefit—future changes in technique can, in principle, continue to reduce the firm’s normal costs as it grows. Hence, “there was no assignable [internal] limit” to the fall of costs relative to growing output; there is no “natural” limit to the size of the firm, and large-scale firms are common—indeed there is, if anything, a natural tendency for them to emerge.134 Ibid. p. 105. For Sraffa’s famous essay demonstrating the flatness (and therefore, for all practical marginalist purposes, the nonexistence of) the marginal cost curve, see Piero Sraffa, “On the Relations Between Cost and Quantity Produced,” Annali di economia 2 (1925), translated and edited by G. Langer and Frederic S Lee at the History of Economic Thought Website (

Andrews calls these large firms oligopolies, not monopolies—a pointed choice of words, ultimately, because for him monopolies don’t really exist. A mature market has “a few” (oli-) firms, practically never just “one” (mono-); and what’s more, the big guys never cease to be competitive, instead engaging in an intense but distinct form of oligopolistic competition.

But just what is a “market”? What does it mean for it to be “mature?” And if firm size and prices aren’t limited by an internal need to “sell at a price determined by the interaction of costs with an external demand constraint,” then what external limits cause it to engage in the ways Andrews expects?

A simple illustration of how firms, markets, and industries relate in Andrewsian competition theory.

In the Andrewsian framework, there are firms, industries, and markets. The firm is our old friend, so I won’t describe it again. An industry consists of a bunch of firms with similar production processes and shared collections of know-how about what goes into making related families of products—the tech industry, the publishing industry, the steel industry, and so on.135A more technical phrase for this know-how is Veblen’s notion of a joint-stock of knowledge. See Thorstein Veblen, “On the Nature of Capital,” The Quarterly Journal of Economics, Volume 22, Issue 4, August 1908, pp. 517—542. Within an industry, a market only emerges when two or more firms decide to produce the same sort of product and thus compete with one another on that specific product line. This is because, after all, firms aren’t widget factories: they almost universally produce more than one sort of thing. Firms choose which product lines to spin up as part of their competitive strategy. It’s only when they decide to make a particular kind of product line that they’ve “entered” that particular market, and this decision to undertake market entry places them into competition with anyone else who’s done the same. In any given market, the proportion of consumers who buy a firm’s product line (as opposed to competitors’) is that firm’s market share. And so, firms can coexist in an industry without competing, as well as find themselves competing with completely different firms from product line to product line. It goes without saying that industries are socially constructed categories with lots of overlap and fuzzy borders, and that they change dynamically as new product lines emerge and old firms enter new markets.136To illustrate this concretely: Samsung competes with Intel in chips but with Apple in smartphones; Apple competes with Netflix in streaming but with Microsoft in PC operating systems; and Microsoft competes with Zoom in teleconferencing software but with Nintendo in game consoles; Nintendo doesn’t compete with Samsung at all, nor Zoom with Intel nor Netflix with Microsoft. These firms could variously be described as part of the tech, video game, semiconductor, telecommunications, and entertainment industries, with several of them straddling more than one at once. And to make matters worse, several of them are one another’s suppliers for inputs in one product line, even as they compete in another product line—a tangled orgy of rivalry and mutual support. So it is across the economy.

And here, more or less, is the secret of oligopolistic competition. The reason monopolies in the strict sense don’t exist is because widget factories don’t exist. Even when a firm has massive market share in one product line—the kind of situation which might cause people to call it a monopoly—this will hardly be true across all its product lines, and it hardly means that it’s escaped the discipline of competitive pressures. Quite to the contrary, nothing a firm achieves, no matter how large, is permanently secure. At any point, another firm—perhaps a start-up, more likely another oligopoly, possibly from an entirely different industry—may decide to enter the market for one of your weaker product lines and overnight gobble up a chunk of your market share. Remember how firms engage in strategic pricing to pursue their myriad goals? This is precisely the strategy that pricing is in service of. A firm must figure out how to manage its surplus so that the company makes fresh advances even as it covers its rear; and further, it must do so across a number of fronts (the various product lines and their markets), each with their own adversaries and competitive logic.137 It’s a cliché that many business people like to read Sun Tzu’s Art of War, and while they’d probably get by reading more directly pertinent material (like Lee!), the skills involved in military campaigns and business administration are clearly transferable. Both involve considerable amounts of strategy and supply chain management. That claim will raise some people’s hackles. After all, a favorite theory of neoliberals—the public choice theory of extremist neoclassicals like James Buchanan—is that everything is a market and all agents, including unions and governments, are profit- and utility-maximizers within them. Many respond by coming up with elaborate reasons for why the capitalist economy (or at least the private sector) and the state or the rest of civil society are separate magisteria that operate by totally different rules from one another, as an argument for why we should support public goods and not leave everything to the market. But once you’ve exploded neoclassicalism and come up with a better microeconomics, a more fruitful synthesis can be achieved from the opposite direction: capitalist firms operate in many (but not all) ways basically like little states, and as in the state, the people in charge of capitalist firms pursue strategies that allow them to reproduce themselves and their desired projects as going concerns, sometimes also attacking the ability of their opponents to do the same.

All that is a great deal to keep track of. To lose ground can have great consequences; complacency means defeat. Remember that firms often subsidize certain product lines with the revenues of more profitable ones, and that they often fund research and capital expenditures out of overall retained earnings. This means that oligopolistic firms with lots of product lines are far more vulnerable than you’d think—a significant decline of market share in even a few of their lesser product lines, and certainly in their most profitable ones, could have knock-on effects that endanger their operations. In dramatic cases, it could even lead to whole departments being shuttered or sold off, to bankruptcy, or to a hostile acquisition. Giants like Trans World Airlines, Borders, Compaq, and A&P once walked the earth, but no more—a fact that’s of no comfort to today’s dinosaurs.

Another related external and structural limit on oligopolies is the dynamics of customer goodwill—that is, the factors generating the willingness of customers to become repeat buyers in the future. It’s distinguished from neoclassical demand in that it has no lawlike, functional relationship to price changes or quantities produced; rather, it’s a sociological set of facts, drawn from marketing and behavioral research, about what makes people and businesses purchase the same products over and over again for periods of time. Andrews discovered that consumers aren’t so much utility maximizers with pre-existing preferences as habit-forming window-shoppers trying to reproduce themselves under conditions of radical uncertainty. That is, they begin with a noncommittal attitude towards different possibilities; have a budget (set by their wages or revenues) which limits what products they can seriously consider; and hence only consider commodity categories that exist within an attention-confining price band making up an acceptable proportion of their budget.138This means that firms will create different versions of the same products targeting different demographics with different budgets and goals—high-end and low-end product lines within the same family, often with surprisingly different supply chains and cost-structures. These are equivalent to Porter’s market segments, mentioned in the footnote about competitive strategies in Footnote 122 above. Yet once they’ve made a decision, assuming they have a good experience, they will form a habit of loyalty and stick to their primary patronage choices in that product category for a prolonged period, so as to reduce the length and uncertainty of window-shopping. However, they may shift their allegiances if a product with similar quality specifications exists at a lower price.139Lee, PKPT pp. 136-137.

The effect of all this on prices is rather complex, and it has nothing to do with the pretensions of the neoclassical price mechanism nor with the simple fables of Monopoly Theory. Rather, it goes back to those institutions of market governance we examined before. Firms that become price leaders tend to be bigger ones that have acquired a large market share in some product line by reducing cost-price through economies of scale; those that have reached a cost-structure (and thus probably also a size) capable of sustaining similar prices can enter this market, while those which haven’t, can’t; hence prices for a particular product line tend to hover around the (low) cost-price of the market’s price leader. Customer goodwill, meanwhile, may keep market share in any given product-line relatively stable, but also prevents the oligopolistic firms from price-gouging or otherwise permanently dominating a market—particularly when it’s considered in light of market entry by similarly sized oligopolies. After all, because prices are strategic they can be set to meet any number of goals, not just minimizing cost-price; and because a company has multiple product-lines, it’s impossible to always make sure you’re the price leader in all of them at once; hence there is usually a gap into which a competitor of similar size can squeeze to gain some market share. No single pricing strategy can guarantee success either. To lower a price has negligible effects on sales and cuts into revenues, perhaps dangerously so if it dips below cost or other key targets; to raise a price is extremely risky, as it may mean your existing customers will choose somebody else. Among other things, these complex dynamics explain the massive interest firms and consumers alike have in maintaining price stability.140Ibid. pp. 115.

Finally, Andrewsian competition theory often sees markets evolving through a series of stages before arriving at maturity. This was spelled out particularly clearly by Jack Downie, a disciple of Andrews who elaborated upon his theory. In the early stages, when product lines first pop into existence, a great number of small firms can enter the market. Then, “the lower-cost and larger enterprises grow at the expense of the higher-cost smaller enterprises,” because those who are cheap can become bigger and those who are bigger have the profit by which to become cheaper—something Downie calls the transfer mechanism. Unopposed, this would result in something like the economists’ imagined monopoly. But it never does, because multiple large firms with similar cost-structures tend to exist, and they can choose to invest their profits into augmenting production in that product-line to lower costs further and secure more market share—Downie calls that the innovation mechanism. (They can also enter a new market entirely “and thereby disrupt the transfer mechanism there.”) When the interaction of these two principles persisted for enough time across an industry of multiple shared product lines, Downie observed an interesting fact: both cost-reduction and market entry were put aside as the small number of oligopolistic firms in that product market “adopted trade practices which inhibited price competition, maintained market shares, and promoted co-operative research.” This managed competition is extremely stable, but it reduces further technical progress or other innovation. It’s where you end up once all there is are McDonald’s, Burger King, and Wendy’s in fast food or the Big Five in publishing.141Though even then, it’s not usually all there is. This is a very important point, since it’s easy to forget the big lingering role that small and medium-sized enterprises (SMEs) play in all economies and many industries, including restaurants and publishing. (Case in point: when you look at the pie charts, the oligopolies added up will sometimes only control a large fraction, not even a majority, of the total market.) It turns out that due to the ability of firms to market to specific niches or compete on quality rather than lowest price, whole ecosystems can develop within industries where many smaller artisanal firms compete with one another in product-lines (or specialized versions thereof) unmolested by the oligopolies, as the big firms simply do not competently provide at a level of quality desired by those niche audiences. Of course, one could argue these indie or sub-industries are just not yet mature, and that eventually their own oligopolies will emerge or the existing ones will acquire the biggest while trampling the rest. But at the very least there seem to be some very strong and countervailing tendencies to this. New product-lines and branches of industry are being created all the time, for example, and smaller firms can be excellent for prototyping them; even if they’re acquired or simply grow themselves, new firms of the same sort in other new sectors won’t cease to be generated. Furthermore, the effective demand that allows firms in a particular market to survive can organize itself semi-permanently into ideological blocs of that adopt a countercultural opposition to large corporations or standardized cheap products, allowing an ecosystem of SMEs appealing to these tastes to perpetuate itself indefinitely; in Andrewsian terms, such consumers have withheld goodwill to oligopolistic firms for long-term aesthetic and ethical reasons. Finally, there’s often a dialectical and mutually supportive, rather than inherently antagonistic, relationship between small and large firms when they’re at different points along the same supply chain—the latter often like to outsource functions via long-term contracts to the former (an oligopoly hiring a mid-sized boutique marketing firm), and the former often depend upon the latter as suppliers to benefit from economies of scale (a tiny little magazine depending on a big printing company to manufacture its issues cheaply). When such relationships exist, the effective demand of one big firm or many little firms downstream can financially support the existence of many little firms or one big firm upstream. Thus, the tendency to concentration seems far from absolute in the economy as a whole, however much it might hold within a single industry.

When we aren’t constrained by lingering attachments to the idea that “normal” competition is driven by the price mechanism, we’re free to realize that the same rules apply to firms regardless of their size. All firms administer their prices in order to survive and to pursue their strategic objectives. Firm size in particular product markets does tend upwards towards oligopoly as industries mature, due to economies of scale, but this never becomes anything like an uncompetitive monopoly due to customer goodwill and the presence of other big firms with the ability to enter product markets and grab a share. Instead, oligopolistic competition tends to produce long-term price stability. This isthe norm, and has been for as long as there’s been a capitalist economy. Walrasian auctions, equilibriums, and demand curves have never existed. As Lee puts it: 

Since the management and administration of markets and market prices by business leaders has always existed under capitalism and certainly has existed for the last hundred years under corporate capitalism, the distinction between monopoly capitalism, competitive oligopoly, and competitive capitalism has no firm foundation. There is thus no basis or reason to distinguish between competitive and monopoly markets.142Lee, PKPT p. 228, footnote 20.


The Reception

While I’ve extensively described the intellectual history and the concepts underlying Lee’s book, I haven’t yet done justice to the sheer size of the body of evidence in support of PKPT

It isn’t just the various microeconomic theorists I’ve mentioned. Other economists, business school professors, sociologists, anthropologists, and journalists in books, journal articles, and studies commissioned by governments and corporations have, when examining the behavior of firms and the structure of markets without the prejudices imposed by neoclassical orthodoxy, arrived at strikingly similar conclusions about how it all works. Over the course of the twentieth century many separate investigators, often with vastly different ideologies and preconceptions, all arrived at something approximating the general framework that Lee unifies into his PKPT. Even those inclined against such conclusions, gravitated towards them eventually.143Particularly illustrative in this regard is the tragic case of Alan Blinder, a neoclassical economist from Yale who made the mistake of trying to understand his own dogmatic theory in light of evidence. When confronted by the same empirical anomalies in relation to marginalism that spurred the development of PKPT—long-term price stability, the non-responsiveness of prices to changes in demand, etc—Blinder had the intellectual honesty not to simply rationalize them away via neoclassical repair but to go out and investigate himself by way of surveys and interviews. Indeed, Blinder was actually aware of Hall & Hitch’s surveys for the OERG and set out to refute them after critiquing their supposed sample bias. Unfortunately for him, he merely confirmed PKPT’s theories in extreme detail. Blinder found that 72% of firms changed prices under four times a year and 45% of them did so just once a year. As for causes, the interviewees consistently cited cost-based pricing, customer goodwill, nonprice competition, and hesitation to change prices as key factors in their decisions, while rejecting neoclassical explanations like menu costs (the absurd notion that prices remain stable because the cost of printing menus, changing stickies, swapping out signage, etc is onerous to the firm—Blinder can only try to make a version of it work that is better described by customer goodwill dynamics a la Andrews). Blinder frequently laments that the results of the surveys are theoretically untidy, but this is only because neoclassical theory must be bent dramatically out of shape in order to cope with them. Seen from the point of view of a superior theory, the data makes perfect sense and requires little adjustment. For more, see Alan Blinder, Asking About Prices: A New Approach to Understanding Price Stickiness (1998) and Paul Downward & Frederic S. Lee, “Post-Keynesian Pricing Theory ‘Reconfirmed’? A Critical Review of Asking About Prices,” Journal of Post Keynesian Economics 23:3 (Spring 2001), pp. 465-483. And whatever the differences in expression, they always assumed a similar form. 

Besides his lengthy bibliography, Lee compiles 71 such pricing studies into Appendix B of the book—a sequence of citations that should live in infamy among the neoclassical economists for definitively refuting the core of their entire theory.144Lee, PKPT pp. 235-240.

But how was all this evidence initially received? Why did it all get buried until Lee rediscovered it for PKPT —and why does it remain so little-known today? The basic answer takes us back to the themes of Lee’s History : strict neoclassical control over the discipline, and the intellectual and organizational fragmentation of the heterodoxy.

Administered price theory’s origins during the Depression were humble, with its theorists busy collecting data and its larger implications for theory and politics largely suppressed. But it exploded onto the US political scene in a surprisingly public and inflammatory way in the postwar period. This was due to a long series of controversies in the steel industry, of all places. The years after World War II were marked by a slow-burning and steady rise in prices across the economy; it was barely noticeable and didn’t affect consumers appreciably, but became the subject of a moral panic. Many believed that steel—a key input into everything from cars to construction to consumer goods—was the culprit, as US Steel and producers under its control were ticking up their prices year by year. Management blamed rising labor costs due to unionization; but the union claimed these had merely kept up with productivity; and the firm, for its part, was making record profits. From a Leesian point of view, it’s clear that this was a battle between capital and labor over who would administer steel prices and what was to be done with the surplus. Shockingly, some powerful contemporaries thought similarly. From 1957 to 1961 a Senate committee led by New Dealer Estes Kefauver and featuring Gardiner Means himself (along with allied economists like John Kenneth Galbraith) was assembled to investigate the role of administered prices in the rising cost of steel. While management refused to make its costs public, the Kefauver Committee produced several books’ worth of evidence concluding that steel prices had indeed been rising regardless of lower labor costs and higher productivity, a mark-up driven by capitalists’ desired pricing strategy even as they blamed workers for it in public.145Such conflicts over administered prices in the steel industry resulted in dramatic events. A massively important 1959 strike took off when the union, seeing record profits and productivity numbers, demanded a raise and limits on management’s ability to fire workers indiscriminately that were rejected; it ended in a forced government settlement that gave labor a small wage increase with an automatic cost-of-living adjustment while retaining management’s desired firing rights; and the four long months of total stoppage resulted in the beginning of other industries’ first imports of cheaper steel from Japan and Korea, the start of what would be a long and permanent decline of US Steel’s global market share. In 1961, management acted unilaterally to raise prices again but was directly shot down by the Kennedy administration, which pressured them into reversing it. A definitive history of the Kefauver Committee and its impact on the steel debates can be found in Kristoffer Smemo, Samir Sonti, & Gabriel Winant, “Conflict and Consensus: The Steel Strike of 1959 and the Anatomy of the New Deal Order,” Critical Historical Studies (Spring 2017).

Administered prices were now, briefly, on the map. Their political implications having become blatantly apparent, their implications for economic theory were briefly given what passes for a debate in economics. By this I mean that the impact administered price theories had on the steel debates forced neoclassicals to give some kind of response to the more robust critiques some of the affiliated theorists had of neoclassicalism and marginalism more generally. Unfortunately, such responses were almost invariably petulant, superficial, incoherent, and in bad faith.146Some neoclassicals, for example, resorted to little more than name-calling, insisting that “administered prices” were a vague, unrigorous, and unscientific concept on their face and could be dismissed off-hand because they seemed (quelle horreur!) to simply do away with supply-and-demand pricing. Others, recognizing precisely what a threat this was, tried by various means to minimize the anomalies upon which the theory was founded, saying for example that marginalist theory already took it into account or that the statistics and interviews that produced the anomalous data were flawed and misleading. Such arguments are easily dispatched with in light of Lee’s comprehensive approach (some were even dispatched at the time), but for the most part the debates were too slow, technical, and confined to academic journals to be much noticed by the public. For the best history of these debates, see Gyun Cheol Gu, “Denial, Rationalization, and the Administered Price Thesis,” MPRA Paper No. 42594 (14 November 2012). For some characteristic neoclassical contributions, see M. A. Adelman, “Steel, Administered Prices, and Inflation,” The Quarterly Journal of Economics, Vol. 75, No. 1 (Feb., 1961), pp. 16-40; George J. Stigler & James K. Kindahl, The Behavior of Industrial Prices(1970); and (just for fun) Murray N. Rothbard, “The Bogey of Administered Prices,” Foundation for Economic Education (1 September 1959).

Probably the most revealing response to the challenge of alternative price theories was, characteristically, by no less than Milton Friedman, the don of the ultra-neoclassical Chicago School and the most famous apostle of neoliberalism. A famous essay of his titled “The Methodology of Positive Economics” was actually written in direct response to the Hall & Hitch OERG data. This papal pronouncement is clearly meant to stand as Friedman’s first and anyone’s last word on the subject, yet it’s a muddle of sophistry masquerading as a masterpiece of philosophy. After some brief and completely unsubstantiated mudslinging about the business surveys’ reliability (“Little if any evidence is ever cited on the conformity of businessmen’s actual market behavior—what they do rather than what they say they do—with the implications of the [cost-based price] hypothesis”), Friedman launches into his main argument: the divergence of neoclassicalism from the data, even wildly so, is no great disaster because no amount of anomalous data in itself can falsify a theory. For you see, any economic theory is necessarily an abstraction from reality that simplifies it; a totally “realistic” theory would require an absurd, impossible amount of knowledge (“the personal characteristics of wheat-traders such as the color of each trader’s hair and eyes, his antecedents and education, the number of members of his family”) that makes it indistinguishable from the confusing totality of information it seeks to explain in the first place; hence it is inevitable that economists should rely on the specific concepts of a supply-and-demand price mechanism, demand curves, perfect competition, etc; and because “the ultimate goal of a positive science is the development of a ‘theory’ or, ‘hypothesis’ that yields valid and meaningful (i.e., not truistic) predictions about phenomena not yet observed,” therefore “criticism of this [empirical] type is largely beside the point unless supplemented by evidence that a hypothesis differing in one or another of these respects from the theory being criticized [i.e. neoclassicalism] yields better predictions for as wide a range of phenomena.”147Milton Friedman, “The Methodology of Positive Economics” in Essays in Positive Economics (1966)

Ultimately, Friedman’s essay isn’t odious because of the main argument itself—the notion that competing theories are to be assessed by their relative predictive power, rather than be tossed out at the first conflict with empirical data, is basic philosophy of science.148The editors themselves have made vociferous—and, it must be said, clearer—arguments to this effect in our initial manifesto, “Words For Our Present Reality” in Strange Matters Issue One (Summer 2022).—Eds. What makes it a fraud is simple: if the goal is to use this argument to defend neoclassicalism, then it fails on its own terms. Because it’s precisely not on the basis of a naive appeal to empirical anomalies that heterodox economists want to throw out the price mechanism, but rather because they have succeeded in building a better mousetrap where those anomalies disappear. And since administered price theories make better predictions about the world than neoclassicalism while using completely different concepts, the latter can be safely dismissed as obsolete. To the extent this wasn’t clear at the time, and Friedman’s highly spurious defense was accepted as the last word within neoclassicalism on the administered pricing debate, I think it’s simply because before Lee’s book neither the extent of the evidence nor the intellectual diversity of people finding it nor its implications for high theory were ever really spelled out in any single place.149Here one might make an analogy to early modern science. Before Copernicus and Kepler were able to sufficiently refine their model of the solar system, models that placed the earth at the center of the universe—and used complex and deranged epicycles to predict the movement of the stars and planets—actually made better predictions than heliocentric ones. The instant this tide reversed, and further observations by Galileo as well as refined models by others were able to trace the stars and planets to a higher degree of precision than geocentric models and without the use of systems that had more exceptions than rules, it became impossible for educated people to side with the orthodoxy while retaining their intellectual integrity. If anything, this comparison gives far too much credit to neoclassicalism—at least epicycles could predict an eclipse. What has general equilibrium done for you lately? 

After PKPT, however, there is no excuse. Lee synthesized the work of his predecessors into a complete and observationally grounded account of the microeconomy, a total alternative to marginalism and general equilibrium. Friedman and the neoclassicals who cite him talk a big game, but let’s see them put their money where their mouth is: put the theories side by side, ask them to make predictions about what will happen in the world under certain conditions, and which comes out better? This is no longer a question to be decided on a whiteboard. Put up or shut up. Anything else is cant and special pleading.

The Upshot

When all is said and done, where does PKPT leave us?

First and foremost, there is no lawlike, functional relationship between price and quantity. Hence the core concept of microeconomics—and, since this is the earliest and deepest core of the theory, of neoclassicalism as a whole—has no empirical basis. The neoclassical toy model, even with its “imperfections” and other hasty repairs after the fact, is demonstrably refutable as a fantasy world.

All prices are administered, all markets are governed. There is no such thing as a price-taker in any absolute sense, nor is there any such thing as a universal practice of exchange from which markets naturally emerge in all times and places absent specific institutions. Whenever a monetary production economy like ours does exist, all prices are set by some agent or another, not in some (semi-)automatic and (semi-)optimized manner but rather in the course of pursuing any of several possible strategies to meet their just as potentially varied goals. And while they are constrained in various ways (by radical uncertainty, by the agency of others in a stronger position, by the institutional arrangements or biophysical limitations which structure their activity), they still act within the bounds of those constraints in a manner totally indeterminate with respect to neoclassicalism’s favored equations. To echo the slogan of my friend and co-editor Steve Mann: it’s people who set prices, not “the market.” The abstract auction of buyers and sellers exchanging barterlike until equilibrium is reached simply does not exist, even as a simplification of any observable trend or tendency in our economy.

All the theories of value are more or less exploded in the wake of PKPT, at least as they were originally articulated and intended. Not only marginalist but also labor theories of value assume a structure that is no longer viable. In a theory of value, there is something called “value” (whether its origin is an objective fact of the labor process or a subjective fact of the mind’s desires) and another thing called “price”; the first determines the second, such that in principle when you know the former you can predict the latter and the latter fluctuates with the former at a lag. It’s all the more problematic that, since we can only observe prices and not “value,” practically speaking we can only ever infer the existence and behavior of the underlying “value” unit from the behavior of prices, making any such theories tautological at best. After PKPT, these difficulties disappear. If price-setting works the way Lee says it does, then no one measurable variable plays the determining role of “value” anyway; and even if one element of economic activity is always and consistently the most important consideration for price-setting (which is arguable), given the wildly different limits on different sorts of price-setter as well as their different goals in different sectors or at different times, it is effectively impossible for a single variable’s fluctuations to produce the uniform and universal results the value theorists so desire—whether it’s the neoclassicals’ markets all clearing at once in general equilibrium, or the Marxists’ profit rates equalizing and declining across the economy.150 This is obviously a pretty abrasive claim, and it goes beyond anything I can cover in too much depth anywhere in this essay, though there’ll be some discussion in Part II. Lee himself is mostly a critical or negative figure as regards value theory, rejecting—because he sees no need for it—classical labor theories of value and neoclassical marginalism alike. For Lee these theories are unnecessary when you can use qualitative research techniques to study the procedures by which people set prices themselves. The PKPT framework also seems to allow for a sort of pluralism—while administered prices can be interpreted as meaning (and more or less originally meant in Means) cost-plus pricing plain and simple, Lee’s discussion of strategic pricing as well as the remarkable catalogs of different pricing methods he and his grad students amassed (e.g. those discussed in Merijn Knibbe, “Toward a Period Table of Prices,” Real World Economics Review Blog [12 July 2022], citing the dissertation of Gyun Cheol Gu) should indicate that what’s more important for him is that it’s people setting the prices according to some rule, rather than that the rule be cost-plus per se. Presumably, for Lee, a pricing strategy can vary from agent to agent, situation to situation, or industry to industry, which is why no single theory of value could encompass and explain them all, much less in a way that lets you deterministically calculate what economy-wide prices will be. Such an expanded vision of “administered prices” might also help future researchers crack the nut of financial and commodities markets, which Lee’s theory as currently constituted has some trouble explaining (more on this in Part II, as well). So much for Lee on value theory—but what about me? It seems to me that the pattern I’ve identified in the text above, whereby economics identifies a separate entity called value and creates a story for how it determines prices, is a way in which nearly all the schools of economics barked up the wrong tree very early on. Steve Mann and I have lately taken to joking that we’re “value atheists”—our tentative position being that no such thing as value in the way economists define it exists, there’s only the range of viable price-setting procedures that particular agents in control of particular prices set according to whatever strategies they choose, under whatever biophysical or cultural or other structural limitations they face, in pursuit of whatever goals they may have—the only test for their success being whether they and their desires projects can continue as going concerns. (That said, I retain a soft spot for the labor theory of value, which is far less incorrect in its intuitions than marginalism and captures important real-world dynamics about reproduction and economies of scale—it’s just not all-encompassing, nor is there any need to peg all prices to labor-hours, an artifact of Ricardianism that distorts more than it illuminates.) A strikingly similar position to this “value atheism” we’re playing with lay at the heart of Bichler & Nitzan’s Capital As Power (CasP) framework. That said, even if value in the economists’ sense doesn’t exist, individual or cultural values in the sense a philosopher or an anthropologist might speak of certainly do, if only as a pluralistic menu of overlapping intersubjective truths, and even quite possibly as artifacts of our ape biology. And, as David Graeber argued in his extremely interesting and underrated book Towards an Anthropological Theory of Value: The False Coin of Our Own Dreams (2001), studying the effect that values in this sense have on economic activity could integrate heterodox economics fully into the rest of the human sciences, allowing it finally to address the ways in which human societies choose to make sacred certain practices or objects, arrive at theories of the good and the beautiful, and so on. Of course, this common-sense definition of “values” has nothing to do with the economists’ “value,” about which after all we’re good atheists. Economists pretentiously sought to explain prices as simply being determined by value, with their being “right” or “wrong” to the extent they deviated from it. Values in the actually existing sense, on the other hand, presumably impact economic activity by shaping the goals, priorities, interpersonal relations, and taboos of agents, who depending on how well-positioned and well-organized they are within society’s decision-making structures may or may not succeed in making these values manifest through how they organize the social provisioning process, appropriate the surplus, and create their shared social world. Lee may be onto something even more important than he thinks when he mentions offhand in PKPT that businessmen believe in an “ethics” of pricing (pp. 91, fn 6).

And finally, what this means for the researcher into economic questions is that they must more or less totally transform their methods. The search for vast and abstract forces whose existence you deduced from your armchair; the attempt to describe them by a system of equations illustrating their simple, linear determination of the world around you; the insistence upon finding excuses for their failure to do so by designing ever more baroque combinations of “imperfections” by which the world deviates from the path towards which it nevertheless must tend (because the model says so!)—these must all come to an end. But this does not mean, as some apostles of the “empirical turn” hold, that economics should turn away from high theory; nor that it should turn totally away from quantification, as some heterodox thinkers suggest. Quite to the contrary on both counts! For Lee, economic research must begin with qualitative methods: call it ethnography, call it journalism, but at any rate it involves identifying the institutions through which things are done, talking to the people making the decisions there, asking them how or why they do so, and observing how they behave when they think nobody is paying attention. By such means one must map out the network of agents, institutions, habits, processes, and goals that make up the situation one is trying to study. And only then, after this qualitative work has been done, should one attempt to build quantitative models up out of the large store of observations, interviews, and historical case studies you have now amassed. To do otherwise would be like trying to write the predator-prey equations before you’ve ever seen a fox chase a hare. A real science of the economy can only come together using the methods of natural history, not those of physics. 

The theories of the firm, administered pricing, oligopolistic competition, and market governance in PKPT took decades to develop and need dozens of pages to half-adequately describe—but they’re only the basic building blocks of Lee’s economic framework. In Part II, we’ll see the final edifice. As Lee grew older and more confident in his core model, he began to dream of how he might expand it. Inspired by certain underrated concepts from Marxian and feminist economics, he grew beyond his Post-Keynesian roots and started to think of his project as the creation of a unified heterodox approach combining their best shared aspects. A tireless activist in the IWW and elsewhere, he started to write explicitly about the connection between his economics, his anarcho-syndicalist politics, and the struggle to abolish capitalism. Inspired by his teacher Eichner’s old dream, he closed in on the problem of how to abolish the distinction between micro- and macroeconomics. And even as his health waned, he was able to complete his masterpiece: a map of the economy as a whole, conceived as a process for provisioning the goods and services society requires to reproduce itself over time. For those who became aware of it, the Leesian framework would prove itself to be one of the most promising achievements of twenty-first century social science. From decades’ worth of careful observation, a totally new picture of our economic world would be born. ~

Strange Matters is a cooperative magazine of new and unconventional thinking in economics, politics, and culture.