Macrodynamics for a Better Society: The Economics of John Cornwall

Abstract

John Cornwall devoted his career to advancing macroeconomics with a view to improving the societies in which we live. We identify three distinct phases in Cornwall's mature scholarship, and analyse the substance of each. The first and second phases, devoted to the analysis of growth and inflation, respectively, reveal the three main cornerstones of Cornwall's macrodynamics: the importance of demand (even in the long run), the importance of institutions, and the path-dependent nature of economic change. The third phase saw Cornwall building on these foundations to develop and refine an evolutionary-Keynesian model of long-run capitalist development.

Notes

¹We write this appreciation as longstanding friends and admirers of John Cornwall. Mark Setterfield was originally a PhD student of John's at Dalhousie University in Nova Scotia from 1988–92. He subsequently maintained close contact with John, collaborating on one research paper (Cornwall & Setterfield, 2002) and, with Wendy Cornwall, on what was to have been a book entitled Economic Policy and Performance: A Keynesian Theory of Capitalist Growth and Transformation. John had close contact with many Post Keynesian economists in Britain, including Anthony Thirlwall. He attended two of the biennial Keynes Seminars at the University of Kent organised by Thirlwall—one in 1991 on Keynes and the Role of the State, for which he wrote the paper ‘Economic malfunction and the role of the state’ (see Thirlwall, 1993), and one in 1993 on Keynes and the Post Keynesians. In 1995, he spent two months with his wife, Wendy, at the University of Kent as a British Academy Visiting Professor. Later he was a frequent visitor to conferences organised by Philip Arestis and John McCombie at the Centre for Economic and Public Policy in Cambridge. We would like to thank an anonymous referee, John King and Steven Pressman for their comments on an earlier draft of this paper. Any remaining errors are our own.

²Cornwall (1963) was published as the lead article in Issue 1, Volume 77 of the Quarterly Journal of Economics, at a time when lead articles were prestigious.

³It also includes the edited volume After Stagflation: Alternatives to Economic Decline (Cornwall, 1985). This volume marked the culmination of the Dorothy J. Killam Memorial Lectures that John organised at Dalhousie University in 1982, featuring Erik Lundberg, Wynne Godley and James Tobin.

⁴Indeed, early in the book, John explicitly discusses the conditions under which the elasticity of aggregate supply with respect to aggregate demand will be exactly equal to one. This is a necessary condition for steady-state, demand-led growth to be sustainable in the long period—a condition that has been ‘rediscovered’ many times since (see Palley, 2002; Setterfield, 2006; Dutt, 2006, 2010).

⁵As, it should be added, is the endogeneity of the natural rate of growth to the actual rate of growth, to which all of the various responses of supply to demand discussed above contribute. See Leon-Ledesma & Thirlwall (2000, 2002); Leon-Ledesma & Lanzafame (2010).

⁶See also Harcourt & Monadjemi (1999, p. 12).

⁷Throughout his career, and despite the subsequent reorientation of his attention away from the subject of economic growth, John remained committed to the view that capitalistic growth is an unbalanced process of which structural change (i.e. changes in the sectoral composition of output and employment) is an intrinsic feature. This is reflected in some of his later writings, including Cornwall & Cornwall, 1994, 2002).

⁸And surprisingly for one of us (Thirlwall).

⁹We return to the topic of constraints on demand, and in particular John's thoughts on the role of the balance of payments constraint, in Section 4 below.

¹⁰In later work, John broadened his criticisms of Classical labour market theory. For example, in a personal correspondence with John during the mid-1990s, Thirlwall (13 May 1996) wrote of the NRU (and its companion concept, the NAIRU) that ‘both are dependent on the highly dubious assumption that there are diminishing returns to labour and that therefore the demand curve for labour is drawn downward sloping. As soon as one relaxes that assumption and assumes either constant costs or increasing returns to labour, the concept of the natural rate loses any meaning. There is plenty of evidence in the short and long run to suggest that there are not diminishing returns to labour (employment and real wages are not negatively related, but positively related)’. An argument to this effect appears in the critique of NAIRU theory in Cornwall & Cornwall (2001, p. 47), where it is pointed out that non-diminishing returns to labour negates the inverse relationship between real wages and employment characteristic of Classical labour demand conditions, and hence any possibility that lowering real wages will be associated with—much less stimulate—higher employment. While John was never less than steadfast in his views, then, he was always willing to listen to reasoned argument and incorporate it into his own thinking when persuaded of its merits.

¹¹The notion of permanent incomes policies—to which multiple chapters of Conditions and Economic Recovery are devoted—has a long pedigree in Post-Keynesian economics. Both Joan Robinson and Richard Kahn were early advocates of incomes policies (Harcourt, 2006, p. 149), while post-war Australian economists such as Wilfred Salter advocated incomes policies as a means of accelerating productivity growth in an environment of un-balanced growth (see Salter, 1960, 1965; Harcourt, 2006, pp. 147–157).

Discussion of permanent incomes policies may seem anachronistic from a contemporary vantage point. But it can be argued that: (i) this is exactly the type of policy—albeit based on generating fear and insecurity in the labour market rather than the consensual view of just outcomes that John favoured—that has been pursued in the US since the early 1980s; and (ii) that this policy contributed directly to the improved macroeconomic performance of the US beginning in the 1990s. See, for example, Setterfield (2007).

¹²John, himself, understood these to be the crucial contributions to his thinking of what we identify as the second phase of his mature scholarship. See Cornwall (1992, pp. 99–100).

¹³Parts of the discussion in this section are based on Setterfield (2009).

¹⁴This is, of course, a project that John shared with numerous other heterodox economists, including Harcourt (2006, Ch. 6), with whom John maintained a life-long friendship following their meeting in Cambridge during the early 1960s.

¹⁵As will become clear in what follows, John's institutionalism was closer in spirit to that of the original institutional economists (on whom see Hodgson, 2004), rather than ‘new’ institutionalists such as North (1990). See Cornwall & Cornwall (2001, Ch. 5) for a critique of new institutionalism.

¹⁶Institutions are not the only constituent of the economy's macrofoundations in John's view—power relations are also important. John himself wrote relatively little about the nature and exercise of power (see the terse definition in Cornwall & Cornwall, 2001, p. 73). Nevertheless, in conversations with one of us (Setterfield) he expressed sympathy for the distinction (found in the work of authors such as Lukes, 1974) between ‘simple’ forms of power associated with the exercise of authority within a hierarchical command structure (as, for example, when managers supervise workers at the point of production), and more subtle ‘structural’ forms of power associated with the exercise of influence. (Consider, for example, a situation where person Y does person X's bidding not because they are acting under the command of person X, but seemingly out of their own free will and volition, because person Y's values, aspirations, preferences and/or goals—i.e. their intrinsic structure—have been deliberately influenced by person X with the intent (on the part of X) of achieving their own ends. This is consistent with the process of ‘reconstitutive downward causation’ (Hodgson, 2002), according to which parts are influenced by wholes, emphasised by institutional economists.) John expressed particular concerns about the role of the modern media in connection with the exercise of this second form of power—again, a theme that has recently been discussed by institutionalists (see Champlin & Knoedler, 2008) following the work of the American linguist Noam Chomsky (see Herman & Chomsky, 1988). Ultimately, John thought of power as an influence on institutions, and institutions as codifying and legitimising power, so that institutions and power together can ultimately be thought of as two sides of the same coin.

¹⁷See also Harcourt (2006, pp. 80–82). In this sense, John's vision is also of a piece with contemporary interpretations of Minsky's financial instability hypothesis as explaining longer-term waves or phases of activity rather than business cycle oscillations. See, for example, Wray (2009).

¹⁸Note that the entire macroeconomic process that gives rise to final outcomes is embedded in the institutional framework in Figure 1—hence the box drawn with the solid line. Meanwhile, in keeping with the analysis of Cornwall & Cornwall (2001), the preferences and constraints associated with macroeconomic policy and aggregate demand formation are singled out as the primary ‘channels’ through which feedback effects from macroeconomic performance eventually affect the institutional framework of the economy and hence the next episode of macroeconomic performance. This explains the partitioning of these features of the model by the box drawn with the dashed line.

¹⁹The mainstream uses the term ‘medium run’ (if at all) to denote an analytically and temporally ill-defined interval between the applicability of fix-price (‘Keynesian’) analysis in the short run, and the orthodox neoclassical (supply-determined) analysis of the long run (see, for example, Solow, 2000).

²⁰As David Colander noted in the foreword to Capitalist Development, John was a Keynesian to the core. Indeed, he frequently referred to his work of the last 20 years as essentially an effort to deepen and extend Keynes' short-run analysis, by uncovering the institutional foundations of the process of aggregate demand formation (the ‘deepening’ project) and providing an evolutionary, demand-determined account of the long run (the ‘extension’ project).

²¹The derivation of the balance of payments constrained level of unemployment, U_B , is provided in the appendix.

²²In terms of Figure 2 and the derivation of U_B in the appendix, assume that , where X denotes real exports and e is the nominal exchange rate (more specifically, the domestic price of foreign currency). Then it seems to have been John's view that any reduction in U—say, a movement towards U* in Figure 2—could, in principle, be accommodated by an accompanying increase in e (i.e. an exchange depreciation) resulting in a rise in X and hence a fall in U_B , thus reconciling the BP constrained rate of unemployment with the preferred rate.

²³Sometimes it even makes appropriate references to the work of Minsky (1978, 1982).