2 Overview of the History of Economic Thought

Transcription

1 2 Overview of the History of Economic Thought Chapter Outline 2.1 History of Neoclassical Theory 2.2 History of Heterodox Thought 2.3 Modern Schools of Thought 1

2 It is neither desirable nor possible to present a detailed history of economic thought in this text that is a topic for another course in economics. However, it is useful for students to have a general overview of the history of economic thought in order to understand where the modern schools of thought (which we will place into one of the two main approaches to economics discussed above Neoclassical or Heterodox) come from. We ll trace the evolution of economic thought from the father of economics, Adam Smith, to the present. 2.1 History of Neoclassical Theory We ve already mentioned Smith s notion of an invisible hand that guides self-interested market participants to act in their own interests as well as those of society as a whole. Over time, this developed into the proposition that if economic agents (those operating in markets including households and firms) take prices as signals, the market can produce an equilibrium set of prices to clear all markets. It turns out that this is a very difficult thing to prove. The first major attempts to do so were by S. Jevons, L. Walras and Menger all in the first years of the decade of the 1870s; while Jevons was most open in his effort to prove that capitalism is best for all, Walras was the most rigorous in his attempt. J.B. Clark (1890s) expanded the mission to go beyond showing that free market capitalism is most efficient to include an attempt to prove that it is fair. For that task he developed marginal productivity theory, which boils down to showing that the allocation of resources is fair since each gets a distribution based on contribution to the production process. By 1890 this Neoclassical framework was well established, even if it had not entirely succeeded in its main tasks. Insert economics chronology diagram This effort continued until the late 1950s when rigorous models based on new math were developed for the purpose. The most important contributions were made by Arrow-Hahn-Debreu, who carefully identified the conditions necessary to demonstrate the existence of a general equilibrium (a vector of relative prices to clear all markets the rigorous Neoclassical definition of equilibrium). Unfortunately, over the following years it was shown that while under very strict conditions the existence of a general equilibrium could be proven, that market-clearing vector of relative prices is not unique and it is not stable. What this means (in very simple terms) is that we cannot say whether one equilibrium is better than another, nor can we say that if the system is not in equilibrium that the invisible hand of free markets would push the economy toward equilibrium. While it might not be obvious, both of these negative results are devastating. Essentially, the first says that there are many, perhaps an infinite number, of possible points of equilibrium, each of them economically as good as any other. One of the things that influences the outcome is the initial distribution of resources we could redistribute initial endowments and get a different general equilibrium, but as policy makers we cannot say that one distribution is better than any other. Maybe we begin with an equal distribution, or maybe we begin with Bill Gates owning everything. We ll get a different general equilibrium in each case. The other negative result that markets do not work to move us to equilibrium really defies the whole hypothesis about the invisible hand: it does not send signals that move the economy to equilibrium. Maybe we need the visible hand of government after all! Here s another interesting thing about this whole (largely unsuccessful) effort: it began soon after Karl Marx s masterpiece, Das Kapital (or Capital) was published in Jevons makes it reasonably clear that his tract (1871) was meant to respond to Marx. Marx s book made two main points. First, capitalism is based on exploitation labour produces all value but capitalists are able to appropriate surplus labour power for their own use. In an important sense this is not fair it is not that labour should receive all of the value that it produces, but rather that surplus labour ought to be at the disposal of society as a whole, rather than directed to benefit capitalists. Second, Marx explained that history is driven by class struggle, by those who produce to reduce appropriation by the upper classes: slaves against slave owners; peasants against feudal lords; and workers against capitalists. Capitalism actually strengthens the efforts of the working class by bringing them together in factories where they can organize resistance. Revolts against the upper classes (especially against capitalists) will gain momentum until finally workers overthrow their oppressors and institute a new kind of society, one in which workers are on top, and capitalists and other members of the upper classes are oppressed. This is called Socialism. Eventually Socialism will evolve to a new form of society Communism in which class society is banished. All are workers, who enjoy contributing to the benefit of society as a whole. We do not need to assess the accuracy of Marx s analysis here. What is important is to recognize that Orthodoxy needed to respond to Marx. Neoclassical economics was developed to do so. Let us quickly look at the evolution of Neoclassical economics after the 1870s. See the right-hand side of the Economics Chronology figure. We will not spend a lot of time here discussing the modern Neoclassical schools of thought, as they will be treated separately in a later chapter. Moving down the far right, the Austrian school developed from the work of Menger and Walras. The main feature of this approach is the devotion to the supposed ability of the invisible 2

3 hand of free markets to achieve equilibrium. Of note, however, is the Austrian acceptance of the importance of decision-making in historical time in conditions of uncertainty. Unlike the most rigorous Neoclassical theory, which allows only for logical time and risk, Austrians (like Heterodox economists) admit that we can only form expectations about the future that can turn out to be wrong. While the economic system moves toward equilibrium, our mistakes cause business cycles. However, the market still knows best so government should not intervene to try to offset the cycle. Indeed, government interventions are more likely to make matters worse. According to Austrians like F. Hayek, it is best to let recessions and depressions run their course as they cleanse the system of imbalances. Supply Siders share this distrust of government. Gaining prominence in the early 1970s, in the time of President Regan and Prime Minister Thatcher, they insisted that the best way to get the economy out of the doldrums was to reduce taxes on the rich and to eliminate government regulations. That would encourage the supply side (the rich) to save and invest more. They are best known for two propositions: trickle down and the Laffer curve. The first is the notion that policies to benefit the rich (such as tax cuts) would actually help the poor as jobs trickle down to them. The second was developed by A. Laffer who argued that government budget deficits could be reduced by cutting tax rates, especially on the rich, because this would unleash the entrepreneurial spirit, causing the economy to grow so fast that tax revenues would grow enough to balance the budget. Both of these policies were put in place under President Reagan. Moving just to the left of the Austrians we have the branch that leads to the modern Neoclassical schools of thought: General Equilibrium (GE), Monetarist, New Classical (NC), and Real Business Cycle (RBC) theories. We ve already discussed the GE approach above. The Monetarist approach derives from A. Marshall (Keynes s professor), A.C. Pigou, and D. Robertson (the latter two were sparring partners of Keynes). Fundamentally based in Neoclassical theory, Monetarism is most closely associated with the work of Milton Friedman, who claimed that inflation is always and everywhere a monetary phenomenon, and who attributed the Great Depression to mistakes made by the Federal Reserve. Briefly, the idea is that when the central bank creates too much money, we get inflation; when it creates too little we get a recession or depression. The best course of action, then, is for the central bank to target a constant rate of growth of the money supply (say, 4% per year). Otherwise, there is little role for the government to play like most Neoclassical economists, Monetarists want to constrain government to a few essential areas such as military defence and perhaps the justice system. The New Classicals (most prominently R. Lucas) added to Monetarism the proposition that all economic actors hold rational expectations and that markets clear instantaneously. We ll discuss these in detail later, but for now it is sufficient to understand that the NC version of Monetarism is simply a more extreme version of Neoclassical economics essentially carrying it to its logical (even if absurd) extreme. Since markets always clear, there really is no such thing as unemployment. The only exception is when the central bank fools workers and employers, but given the assumption of rational expectations, fooling is very hard to do and can be done only randomly and temporarily. Markets will quickly right themselves. Hence, during the decade-long Great Depression there really was no problem of unemployment, rather, people without jobs were voluntarily taking a leave of absence as a result of their utility maximisation: at the going real wage, they preferred leisure over work. Real Business Cycle theory presumes that money is always neutral that even temporary fooling cannot take place so that what we observe as a business cycle is not a cycle at all but rather represents a random walk that results from random shocks to the economy. The most important of these are shocks to productivity, likely from large and random technology shocks that increase or reduce labour productivity. When a negative shock hits the economy, real wages fall with reductions to labour productivity; utility maximising workers leave their jobs because leisure offers more utility than the lower real wage. A positive shock raises productivity and real wages, causing maximising individuals to take jobs. Thus, there really is no such thing as involuntary unemployment as everyone is always optimising and the economy is always in equilibrium. This is not to say that those who are not working would not be happier with higher wages and jobs, but that given their labour productivity and the real wage they could get from working, they prefer leisure. 3

4 2.2 History of Heterodox Thought Let us now move down the left-hand side of the figure. The school of thought from Smith through D. Ricardo to Marx is called the Classical school of thought. The two central features of this school are its class-based approach and its labour theory of value. As discussed above, the two main classes of capitalism are the capitalists and the workers who struggle over the distribution of output. Workers do not own the means of production (tools, machinery, factories) so generally must work for capitalists. Capitalists prefer to maintain a reserve army of the unemployed to hold down wages; if their workers demand higher wages, the capitalists threaten to recruit from among the ranks of the unemployed. There is no tendency toward equilibrium at full employment; rather the economy is subject to periodic crises, that might become increasingly severe. According to the labour theory of value, labour produces all value, but receives only a portion. The rest goes to capitalists as profits (and to other classes such as feudal lords, government officials, and religious authorities as rent, taxes, tithes, and other deductions from the surplus value created by workers). Equilibrium is not defined as a position of market clearing, but rather as a tendency toward equal rates of profit on capital. We will not go into these theories in detail, however, American students will be interested to know that Benjamin Franklin that Jack of all trades contributed to the development of the labour theory of value. Today s Marxists carry on in this tradition. In the centre of the figure we have John Maynard Keynes, arguably the central figure in the development of modern macroeconomics. His influences were T. Malthus (a contemporary of Ricardo and a vehement critic of the Classical approach) as well as his own teacher, Marshall. Note that both of these have been included within the Neoclassical tradition. From Malthus, Keynes adopted the theory of insufficient aggregate demand. Briefly, that is the recognition that while it must be true that aggregate income generated from production must be great enough to purchase aggregate output (which is the foundation of the Neoclassical Say s Law), those who receive income might not spend it. This was the basis of one of the greatest debates in economic literature, between Ricardo and Malthus with Ricardo holding to Say s Law and Malthus arguing that we need an unproductive class that consumes without producing in order to fill demand gaps. To be sure, Marx also had a theory of effective demand, and it is probable that Keynes was also influenced by Marx s theory. Indeed, Marx s theory was more coherent and similar to Keynes s theory than the argument of Malthus, because Marx recognized that there are two different kinds of spending (consumption and investment) while the Ricardo-Malthus debate was solely about consumption. As we ll see later in this text, Keynes argued that Say s Law is broken because people tend to spend only a fraction of their incomes on consumption, which does open a demand gap that must be filled by another kind of spending investment. When investment is too low, we have a problem of effective demand and thus unemployed resources including labour. For Keynes, this is a normal situation, and hence in general Say s Law does not hold. From Marshall, Keynes learned an appreciation for including institutional detail. Like Ricardo, Keynes was intimately involved in financial markets he made, and lost, and remade fortunes in the stock market, commodities markets, and foreign exchange markets. He was also a top advisor to the UK Treasury, and was already famous for a number of books written previous to his General Theory (GT) (1936) that developed Keynesian Theory, and modern macroeconomics itself as a separate discipline from microeconomics (Keynes would not have been happy about that, as his macroeconomics was fully integrated with his microeconomics). Among other subjects, Keynes wrote a treatise on the Indian currency, a critique of the reparations imposed on Germany after WWI (correctly predicting that the burden would prove to be too much to bear contributing to Weimar hyperinflation as well as the conflicts that helped pave the way to Hitler s rise to power), and major works on money and monetary policy. He also wrote an interesting little pamphlet on The End of Laissez Faire in 1926 that presented a powerful rejection of the notion of an invisible hand. In some ways that piece laid the groundwork for his GT. In 1926 he did not present an alternative to Neoclassical economics, although he knew what was wrong with it. In 1930 he began to develop an alternative (in his Treatise on Money, two volumes) but he wrote to friends immediately on publication that he was already dissatisfied with it. He had not yet escaped Neoclassical theory. Finally, in 1936 he provided a coherent alternative. The Great Depression showed that Keynes s intuition back in 1926 had been correct: the invisible hand not only did not move the economy back to full employment equilibrium, but in fact was making things worse. As sales fell, firms laid off workers; as workers lost their jobs and income, they cut back on purchases. Falling sales led to more lay-offs, and to slashing of wages and prices. Unable to cover costs, firms went out of business, leading to more job loss. Rather than falling wages and prices generating more hiring and more sales, they led to precisely the opposite. Left to its own devices, the invisible hand would have driven unemployment to 100% and sales to zero. Government had to intervene to stop the decline into ever-deeper depression. Keynes s GT provided the theoretical framework to explain what needed to be done, and how it worked to stop the downward 4

5 spiral. To be sure, the GT provides much more than a justification for government intervention. But the evidence of the depression gave Keynes s book much credence. It very quickly became a classic. There was a small group of (younger) economists working with Keynes at Cambridge University, known as the Circus, reading and commenting on drafts. After Keynes s death in 1946, they carried on the Keynesian tradition, mostly in the UK and also in Europe (especially in Italy) and Australia. Keynesianism also spread to the USA, propagated by A. Alvin and P. Samuelson, however, in America Keynes s macroeconomics were synthesized with Neoclassical theory to produce what Samuelson called the Neoclassical Synthesis. J.R. Hicks had developed the ISLM model in 1937 and this served as the basis for American Keynesianism. However, the Circus followers of Keynes especially J. Robinson, rejected this version of Keynesianism and proceeded to develop and extend Keynes in a manner they considered to be closer to the true spirit of his GT. This came to be called Post Keynesian economics. The best-known early Post Keynesians are P. Davidson and H.P. Minsky (USA), J. Neville and G. Harcourt (Australia), T. Rymes (Canada), P. Garegnani, L. Passinetti, and Sylos-Labini (Italy) and etc. Over time, several distinct strands of Post Keynesian theory were developed, including the Neo-Ricardians (followers of P. Sraffa, who worked with Keynes and who edited the works of Ricardo), the Surplus or Long Period approach (which combined Sraffian and Keynesian economics), the Franco-Italian Circuitiste approach (among whom A. Graziani is one of the best known), the Fundamentalist Keynesian approach (Davidson), and the Financial Keynesian approach of Minsky. There are also Post Keynesians who focus on developing an alternative microeconomics that is consistent with Keynesian macro. Many of these follow the work of M. Kalecki, a Polish economist who also was at Cambridge with Keynes. Among other contributions, Kalecki developed the mark-up approach to pricing, as well as the Kalecki profits identity (to be discussed later in this text), and explicated business cycle dynamics. 5

6 2.3 Modern Schools of Thought Note that we have drawn a dotted line from Keynes to modern Bastard Keynesians the version of Keynes propagated largely by American Keynesians like Samuelson, J. Tobin, and R. Solow. The use of the word bastard comes from Robinson, who proclaimed that while we know who the mother of this approach is (Neoclassical economics) we really do not know who the father is (it is not Keynes, in her view). Still, these Neoclassical Synthesis Keynesians (as Samuelson called them) claim allegiance to Keynes, and do accept the theory of effective demand. While they believe that market forces will eventually move the economy in the direction of market-clearing equilibrium, they argue that this could take too long, causing unnecessary suffering among the unemployed. Hence, they advocate use of monetary and fiscal policy to fine-tune the economy, hastening the move to equilibrium (essentially, by assisting the sometimes weak invisible hand of markets through judicious use of government intervention). They claim that there is a trade-off, however trying to lower unemployment will increase inflation (the Philips Curve trade-off that we will study later). In the 1980s an offspring of the Neoclassical Synthesis Keynesianism was developed, called the New Keynesian approach. It adopted much of the framework of the New Classical economics of Lucas, including rational expectations. However, they added various kinds of frictions to the market that keep it from moving quickly to equilibrium. One friction was already well-known, minimum wage laws that prevent wages from falling sufficiently to clear the labour market. New Keynesians added many other frictions that prevent wages, prices, and interest rates from moving quickly and by large enough amounts to restore equilibrium together these lead to sticky wages and prices. Again, this could give a role for the government to play, to intervene to offset problems created by inflexible wages, prices, and interest rates. Gradually, the notion that wages and prices are sticky gained popularity, and many mainstream models now explicitly adopt this assumption. The dominant mainstream approach is now the New Monetary Consensus which includes many of the features of all of these recent Neoclassical schools of thought: sticky wages and prices, rational expectations, a Philips Curve unemployment-inflation trade-off, an aggregate demand equation (similar to the investment-saving curve in the ISLM model), and a role for monetary policy to play (a replacement for the money demand-money supply curve in the ISLM model). The final major figure we need to discuss is T. Veblen, an American social scientist who came up with a number of terms we still use, such as conspicuous consumption, the leisure class, and pecuniary emulation (also called keeping up with the Jones s in America). He is the founder of the Institutionalist approach to economics that emphasises the role of culture, norms of behaviour, and institutions. By institution Veblen meant much more than, say, a financial institution or a religious institution. He included patterns of behaviour (for example, gift giving at Christmas) and even patterns of thought (pecuniary emulation). He posited a dichotomy between the industrial arts (producing goods and services) and the business enterprise (making monetary profits). Like Keynes, Veblen wrote a prescient and devastating critique of the Neoclassical belief that the invisible hand of the market would guide everyone to serve the public interest. Indeed, in 1926 (?check) he wrote a short pamphlet titled Sabotage that argued the captains of industry (capitalists) had created cartels to sabotage (conspire to reduce) output in order to keep prices up; he predicted that this would lead to a tremendous economic depression which turned out to be quite correct. Veblen s followers included J.R. Commons (who developed theories of law and economics) and W. Mitchell (the father of business cycle theory), and later John Kenneth Galbraith (perhaps the most famous American economist). Several branches of Institutional economics developed, as shown in the Economic Chronology figure. While some of the earlier Institutional economists were somewhat wary of Keynes s economics, most of the later have integrated Keynes and Veblen. The Radical Institutionalists also draw heavily on Marx. A point of departure from Marx, however, is that many Institutionalists follow C. Peirce, J. Dewey, and C. Ayres in adopting instrumental value theory and pragmatism rather than Marx s labour theory of value. While these are difficult philosophical concepts, Institutionalists emphasize that the purpose of theory (indeed, of thought) is as an instrument to take action to solve problems. What is valuable is the means to reach an end in view. Human thought and action are purposive, and should be judged on the basis of their ability to achieve the purpose. The final point to make is that most of the Heterodox schools of thought follow the three main figures, Marx, Veblen and Keynes, in adopting a monetary theory of production. In a capitalist economy, the purpose of production at least that which is undertaken by capitalists is to make profits. To undertake production generally requires money the inputs to the production process are bought or hired. The output is then sold in markets for money. The hope, of course, is that the capitalist ends up with profits, which requires that the output is sold for more money than it cost to produce. So, as Marx put it, we can view the process as M-C-M, where we start with some amount of money (M), to produce commodities (C, which is both goods and services) to sell for more money (M ). So long as M is greater than M, profits have been made (M -M = Profit). 6

7 This has necessarily been a very brief introduction to the history of economic thought. We will discuss many of these modern economic schools of thought in more detail throughout this text. The background provided here is merely designed to place into historical context these modern schools to see how they are linked to the greatest economists since the days of Adam Smith. This is no substitute for a serious investigation of the history of thought which can only be provided in a course devoted to the topic. You might want to refer back to the Economic Chronology figure later when we discuss particular schools of thought in more detail. Let us finish this chapter with an even briefer survey of the links between post war economic history and the development of economic thought. When the Great Depression began after September 1929, the schools of economic theory were not finely drawn. The most common textbook was Marshall s Principles of Economics, which used diagrams to introduce supply and demand, the marginalist approach, and utility theory. In the text, Marshall provided institutional and historical detail to illuminate the arguments. He was the most important contributor to the rise of British Political Economy based on Neoclassical theory. His student, J.M. Keynes became editor of the top British academic journal, the Economics Journal, at a young age. Still, when it came time to criticize Neoclassical theory in his General Theory in 1936, Keynes had to systematise a still somewhat incoherent approach. He used another of Marshall s students, A.C. Pigou, as something of a foil arguing that for him to reach the conclusion that falling wages would resolve the unemployment problem then he must believe such and such. (For example, see Keynes s GT Chapter 2.) The link between a handbag of theories and policy recommendations was not yet coherent. In other words, there was nothing like Paul Samuelson s post war textbook, Economics: An Introductory Analysis to lay out the principles in a systematic manner. Further, Classical British Political Economy was not widely accepted in the USA. Indeed, the top US journal was the American Economic Review, founded in opposition to the Neoclassical approach by American Institutionalists. Economists working in the Institutionalist tradition played a big role in economic policy, embarking on experiments especially at the level of US states that would prove useful in the 1930s. American policy was pragmatic, so when the Depression hit, even conservative President Hoover began to implement New Deal -type policies. Policy-makers did not wait for economic theory to catch up to real world events they knew they had to do something. Still, they did not do enough, and it was not until President Roosevelt took office in 1933 that more decisive action was taken. This included a bank holiday and fundamental reform of the financial system; creation of New Deal jobs programs that employed a total of 13 million workers; and a huge growth in the size of the Federal government, which took responsibility for building the nation s infrastructure and for guiding the economy. Roosevelt brought into his administration many of the nation s Institutionalist economists, who would continue to play a big role in policy formation all the way to the 1960s. (J.K. Galbraith served Presidents in important roles from Roosevelt to Kennedy.) However, as discussed above, Keynesianism gradually took over economics both in the UK and in the US and elsewhere. Institutionalists were at first suspicious. In the hands of economists like Samuelson, Keynesianism was simplified and rendered mechanical with simple macroeconomic models that downplayed the Institutionalist concerns with details. Questions about distribution, financial institutions, sectoral impacts of policy, and even national industrial and employment policy were shunted to the side as economic policymakers emphasised pump-priming general aggregate demand stimulus and argued that growth alone would resolve most problems because a rising tide lifts all boats. At the end of the 1960s, Samuelson was even quoted as claiming that recessions and inflations were a thing of the past, because economists knew how to fine-tune the economy. But they did not. Recessions immediately reappeared in the 1970s, and inflation accelerated by the end of the 1960s. Because mainstream economics had endorsed the Philips Curve trade-off, it was not possible to fight the simultaneous appearance of inflation and unemployment what would later be called stagflation. Problems grew throughout the 1970s as stagflation rose and economic growth slowed. This allowed Neoclassical economic theory to return with a vengeance in a more radical form than that against which Keynes had fought. Milton Friedman and his followers had been developing Monetarism as an alternative to Keynesianism throughout the 1950s and 1960s, and the events of the 1970s gave them the opportunity to strike. Friedman had never bought the fine-tuning argument nor the Philips Curve trade-off. His 1968 American Economic Association Presidential Address had presciently predicted accelerating inflation (meaning, no stable trade-off of inflation for unemployment). His policy recommendations were radically free market he opposed Social Security for the aged, Medicare for the sick, and even licensing of doctors as unnecessary government interference in private decision making. However, with the rise of Neoliberalism (called Neoconservatism in the USA) from the time of President Reagan and Prime Minister Margaret Thatcher, these radical recommendations became mainstream. Over time, many of Friedman s claims and policy recommendations came into question, even by the mainstream. Chairman Paul Volcker tried to implement Friedman s money growth rate rule (fix the rate of growth of the money supply at some constant but low rate say, at 4% per year) to fight inflation in By 7

8 1982 he gave up he couldn t hit the target and in any case, the growth of the money supply and the rate of inflation became unhinged. By the late 1980s the US Fed gave up any pretence of controlling the money supply and by the 1990s no major central bank was targeting money supply, as all of them switched to the Keynesian recommendation to target the overnight interest rate. Further, it became apparent that money supply growth and nominal Gross Domestic Product (or National Income) growth are not so closely linked as Friedman had always claimed so even if government could control the growth of the money supply, that would not allow it to control inflation. Friedman s claim that inflation could be brought down quickly and with little economic cost in terms of rising unemployment through proper monetary policy also seemed to be inconsistent with real world experience (inflation was reduced during the 1980s, but only with lower economic growth and much higher unemployment rates). In the sphere of economic theory, Neoclassical economists moved to rational expectations and rejected Friedman s theory that central bank policy works by fooling workers and employers (this will be explained later). Many rejected the distinction between the short run where monetary policy is said to be potent (hence, money is non-neutral ), and the long run where it is impotent (money is neutral ), in favor of the presumption that anticipated monetary policy is always neutral. As discussed above, they moved on to Real Business Cycle theory, where (apparently) cyclical swings are due to real factors such as labour productivity. The role for government to play in the economy shrank far below that admitted even by Friedman, as Neoclassical theory circled the wagons against virtually any government intrusion into the economy. The Invisible Hand became more powerful than it had ever been. The Global Financial Crisis of 2008 led to Keynes: The Return of the Master as Keynes s biographer, Lord Robert Skidelsky titled his 2009 book. It called into question the whole edifice of the Neoclassical theory that the Invisible Hand knows best, and led to growing interest in Heterodox economists like Marx, Veblen, Keynes, and especially H.P. Minsky, who had developed a theory of financial crises based on Keynes s insights. For a while it even looked like Orthodoxy was dead that teachers would abandon the Neoclassical textbooks and that policy-makers would spurn the advice of their Neoclassical economists. While that view was overly optimistic, the crisis has created a lot of doubt about Neoclassical theory and renewed interest in Heterodoxy. Going forward, there is a real chance that Heterodoxy could regain its lost dominance. 8