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Published by EH.NET (August 2002)
John Cornwall and Wendy Cornwall, _Capitalist Development in the Twentieth
Century: An Evolutionary-Keynesian Approach_. Cambridge and New York:
Cambridge University Press, 2001. xv + 286 pp. $60 (hardback), ISBN:
0-521-34149-3.
Reviewed for EH.Net by Richard Vedder, Department of Economics and College
of Business, Ohio University. <[log in to unmask]>
As David Colander accurately states in his forward to _Capitalist
Development in the Twentieth Century_, John and Wendy Cornwall "are true,
unrepentant Keynesians." In this _tour de horizon_ of modern macroeconomic
history, aggregate demand is the leading actor -- cycles in economic
performance are determined by the robustness of aggregate demand. The
Cornwalls more or less believe in the reverse of Say's Law: Demand creates
its own Supply.
The authors believe that the best single indicator of an economy's
macroeconomic performance is the rate of unemployment. Unemployment
was relatively low or "full" in many Westernized nations in the 1920s, and
especially in the "golden age" of the 1950s and 1960s. The reason, they
believe, is that aggregate demand was growing by healthy amounts in those
eras. By contrast, the period since 1973 has been one of sluggish economic
performance, explainable in large part by institutional (often
government-imposed) restraints in the growth in aggregate demand. The slow
growth in aggregate demand, the authors opine, has led to reduced savings,
investment, and productivity growth. Of particular importance, nations
where labor, business and government reached "social bargains" (incomes
policies) were able to stimulate aggregate demand through government
policy, but most of these social bargains fell by the wayside after 1973.
While my overall impression of the book is not favorble, it nonetheless has
several strengths. Let me mention four. First, it is reasonably well
written, using enough symbols, jargon and econometrics to keep professional
economists satisfied, yet at the same time it is clear enough for the
intelligent layperson to understand the rudiments of the main points. In an
era and profession where writing incomprehensibly is considered to be a
sign of virtue and erudition, this is no small accomplishment. To be sure,
the discussion of such things as "hysteretic processes with exogenous
origins" (p.102) is filled with typical academic pretentious jargon that
would put the most diehard Keynesian to sleep, but on the whole this book
is above average in clarity for economist-written works.
Second, the book makes an important point, that many economic model
builders ignore, specifically that institutional arrangements and the
structure of the economy matter, and often matter a great deal. Moreover,
as the Cornwalls observe, institutional arrangements change over time with
economic changes, and this can impact economic performance.
Third, while the authors are truly militant Keynesians, they realize that a
1950-style old Keynesian story simply will not cut it in today's world. In
particular, they eschew Keynes's emphasis on the short run, and try to
evaluate the impact that aggregate demand has on intermediate to longer run
economic growth. With the decline in the importance of the business cycle,
this is a necessary adjustment. The Cornwalls also reject or downplay much
of the New Keynesian emphasis on microanalysis of wage and price rigidities
(e.g., efficiency wages, menu costs, and so forth). Borrowing some from
ideas of the New Institutional Economics, the Cornwalls believe that
evolutionary changes in institutions and economic structure have an
important role to play in explaining changing economic performance.
Lastly, as EH.NET readers will applaud, the Cornwalls appreciate the
importance of history, ad its usefulness in assessing economic phenomena.
While not economic historians, they have written what is a somewhat less
than comprehensive but still interesting macroeconomic history of the
twentieth century within the context of trying to explain what makes the
macroeconomic world work.
Yet, despite all of these virtues, this is in my judgment a badly flawed
book for a simple reason: I think the authors are just plain wrong in their
assessments. Moreover, they are not merely sporadically wrong, but
persistently and unrelentingly mistaken. To borrow a favorite Cornwallian
term, this book suffers a bad case of misguided intellectual hysteresis. To
be fair, I am not a Keynesian (although I started out as one), so a priori
one would not expect a particularly positive assessment of this work from
me. But I suspect that more neutral observers on the
Keynesian/non-Keynesian continuum would find many of the same objections.
Before enumerating some problems with the Cornwalls' analysis, I would make
an obvious point that the issue of whether economic progress is supply or
demand-induced is not a new one. For example, many trees have been
destroyed making books on the question of whether the Industrial Revolution
is best explained by emphasizing supply or demand. In an era where demand
is increasingly taken for granted, the Cornwalls' book does make us at
least consider the possibility that the new (post-Keynes) conventional
wisdom might be wrong.
I would also note that in some respects Cornwall and Cornwall show
deference to an early, classical tradition that in some ways is the
antithesis of Keynesian economics as practiced in the original by Keynes
himself. For example, the authors stress the importance of capital
formation in long-term growth, a view far more akin to Adam Smith than to
Keynes. Original Keynesian analysis vilified savings, the funding source
for capital formation, yet Cornwall and Cornwall believe that investment is
critical to the dnamic process of long-run economic transformation. There
is a bit of Adam Smith, and also a lot of Joseph Schumpeter, in the
Cornwall and Cornwall interpretation of history.
Turning to the objections, it is argued that there are swings in economic
performance explainable by changes in the robustness of aggregate demand
influenced by institutional changes. In particular, the 1950s and 1960s
were the "golden age" of modern economies, and the era since 1973 has been
something of a disaster because of declining growth in aggregate demand.
Virtually the sole criterion used to evaluate economic performance is the
unemployment rate. Unemployment is higher in the last three decades, so
economic performance has worsened. I would suggest this is a highly
questionable basic premise as it pertains to the U.S., although it is
certainly more defensible for Europe. While average unemployment rates in
the 1980s and 1990s were higher than in the 1950s and 1960s in the U.S., by
most other measures the economy in the latter period either approximately
equaled or surpassed the earlier record. Real per capita GDP grew 57
percent from 1950 to 1970 - and 55 percent from 1980 to 2000 - hardly an
important distinction. Real household wealth rose faster in the latter
period, and real per capita consumption rose by almost the same amount in
both periods. Job creation was actually _greater_ in the latter period --
the number of new jobs per 100 incremental population over 16 was 64 in the
1950-70 period, compared with 81 in the 1980-2000 era.
The authors assert that increased unemployment was involuntary in nature,
citing the rising duration of unemployment as evidence. I would argue that
most the rise in unemployment, especially in Europe, reflected onerous new
labor regulations and the impact that increasingly generous welfare state
benefits had on the desire to work. Reservation wages rose sharply as the
alternative to work -- long-lived generous welfare benefits -- bcame a
viable option. Why is the duration of unemployment more than twice as high
in Germany as in the U.S.? Germans can collect generous unemployment
benefits for three to four times as long as Americans without any adverse
consequences. These unemployed are hardly "involuntarily" out of work. A
secondary factor in the unemployment rise in the 1970s and 1980s was
demographic: an increase in the proportion of workers in young age cohorts
that are typically more unemployment-prone.
The Cornwalls _assert_ that governmental macro fiscal and monetary policies
can reduce unemployment through heightened aggregate demand. It is argued
that political constraints limited the use of demand stimulus after 1973.
The evidence shows otherwise. In the U.S. the federal government ran far
greater fiscal deficits on average in the two decades after 1973 than in
the two decades before. For example, in the midst of the "golden age" of
the 1960s, the federal deficit was less than one percent of GDP in eight of
ten years, while the smallest deficit in the 1980s was nearly three times
that amount. Monetary growth on average was greater in the latter era as
well (the median annual growth rate of M1 in the 1960s was 3.5 percent; in
the 1980s, it was 7.0 percent). The same pattern generally is true in
Europe. The Cornwalls simply refuse to admit the problem may have been the
impotency of macro stimulus, and they claim fiscal/monetary constraint in
the latter period prevented full employment, despite the evidence that such
constraint was simply not present.
The discussion of the Great Depression is also wanting. Other than the
Friedman-Schwartz monetary explanation, there is no mention of other
non-Keynesian explanations of the Depression, including ones stressing
international monetary disturbances (e.g., Barry Eichengreen), Austrian
business cycles, or the Hoover high wage policy. The Keynesian argument
explaining the Depression was made better, in this author's judgmnt, by
earlier writers such as E. Cary Brown.
Moreover, there is not a scintilla of hard evidence relating to the "social
bargains" (incomes policy) allegedly common in the 1950s and 1960s compared
with later years. There is no description of how these policies worked in
specific countries, for example. We are supposed to take on blind faith the
repeated assertion that income policies worked in producing the golden age
of the 1950s and 1960s, but broke down somehow after 1973. Somehow a single
regression equation (p. 91) with no social bargain variables is construed
to support the Cornwalls' incredibly weak argument.
The book is full of absolutely wild assertions. A few samples: "The view
that an increase in aggregate demand will not reduce involuntary
unemployment because it is unable to reduce the real wage contains the
implicit assumption that the real wage is determined in the labor market.
This assumption has been shown to be unrealistic..." (p. 46) A single
unpublished paper from 1990 is used to back up this assertion. Better yet,
"Over two decades of neoliberalism have revealed its similarities to the
laissez-faire regimes of earlier times -- prosperity for the few and
insecurity for many" (p. 268). To argue that in, say, the 1990s, few had
prosperity but many were economically insecure in the U.S. or Europe is
simply fiction. Speaking of the era after the golden age, the authors claim
that "the role of government in domestic and international economic affairs
has been greatly reduced, social bargains no longer dominate labor market
outcomes and price stability has become an overriding economic goal" (p.
242). It is a fact that government spending as a percent of GDP has risen,
not fallen, in nearly every major western industrialized country in the era
since the so-called golden age, and regulatory activity has increased as
well. To say that government's role has been "greatly reduced" simply
defies the factual evidence.
The posibility that rising unemployment and sluggish growth in Europe
reflects the debilitating effects of high taxation, regulatory rigidities,
and the disincentive effects of the welfare state is virtually ignored.
There are a variety of plausible explanations for economic changes that
have occurred in the past several decades, but the Cornwalls have not
presented them. Save your money: don't buy this book.
Richard Vedder is co-author of _Out of Work: Unemployment and Government in
Twentieth-Century America_ (New York: New York University Press, 1997).
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Published by EH.Net (August 2002). All EH.Net reviews are archived at
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