Episode 46 · 2020-11-15 · 23:42 · Original in Finnish
Neoclassical economics and its history | Juhana Vartiainen | Negotiator 46
Originally published as “Uusklassinen taloustiede ja historia | Juhana Vartiainen | Neuvottelija 46”
Juhana Vartiainen traces the development of macroeconomics from Adam Smith to the present: the division of labour, Ricardo's comparative advantage and Dani Rodrik's argument that the losers explain Trumpism, Marx as valid analysis of a transient historical phase, Marshall's marginalism, Keynes as the founder of macroeconomics and Hayek as the counterweight. The closing section covers Friedman's critique of inflation expectations, central bank independence that succeeded rather too well, and why Vartiainen does not consider Modern Monetary Theory new.
Core theses
- Today's economic policy dispute — zero rates and expansionary fiscal policy against zombie firms and failed market screening — is a direct replay of the Keynes–Hayek argument of the 1930s.
- Marx's analysis of subsistence wages and exploitation was accurate for a specific transient phase in which a rural reserve army of labour existed; China repeated the same phase and is now leaving it.
- Comparative advantage still holds, but Rodrik's refinement matters politically: with barriers already low the remaining gains are small while the losers are as concentrated and vocal as ever.
- Central bank independence and inflation targeting succeeded too well — with expectations anchored at zero, raising inflation is hard, which returns us to precisely the liquidity trap Keynes described.
- Modern Monetary Theory is not new; the post-war consensus thought similarly. The real risk is political learning: once deficits can be financed from the central bank, demand eventually outruns what the supply side can deliver — a central bank cannot print cars or nurses.
Watch and listen
Key moments
- 00:00 — Adam Smith and the division of labour
- 02:34 — Ricardo, comparative advantage and Rodrik's critique
- 05:09 — Marx and the transient phase of the reserve army
- 07:41 — The China analogy and the Luddites
- 10:14 — Marshall and neoclassical economics
- 12:44 — Keynes founded macroeconomics
- 15:32 — Hayek, spontaneous order and today's dispute
- 18:05 — Friedman, inflation expectations and central bank independence
- 20:43 — The deflationary world and what is not new about MMT
- 23:16 — Where economics is going
Summary
Juhana Vartiainen traces the development of macroeconomics from Adam Smith to the present: the division of labour, Ricardo’s comparative advantage and Dani Rodrik’s argument that the losers explain Trumpism, Marx as valid analysis of a transient historical phase, Marshall’s marginalism, Keynes as the founder of macroeconomics and Hayek as the counterweight. The closing section covers Friedman’s critique of inflation expectations, central bank independence that succeeded rather too well, and why Vartiainen does not consider Modern Monetary Theory new.
What is discussed
- Smith. Goods reach us because the brewer and the butcher pursue their own position, not our welfare — and everyone’s consumption possibilities grow as a result.
- Ricardo, and Rodrik’s refinement. Comparative advantage holds even when one country is better at everything. But removing barriers raises income on average, not for all; with barriers already low, the residual gains are small while the losers persist — the political economy of Trumpism.
- Marx was right about a phase. Subsistence wages and exploitation described a singular moment when rural migration outran factory absorption. Once the reserve army was exhausted, competition for workers and unionisation ended it.
- China ran the same film. Cheap labour during early reform, hugely profitable — and now wages approaching marginal productivity as the countryside empties.
- Marshall. Perfect competition, rational agents, cost and production functions — the economics still taught today.
- Keynes founded macro. Output depends on consumption and investment; wages do not clear the labour market; the General Theory describes today’s liquidity trap and the string you cannot push.
- Hayek’s spontaneous order. Nobody understands how the system arose, so nobody can steer it; over-steering breaks the screening mechanism that separates good firms from bad.
- The replay. Central banks flooding markets and expansionary fiscal policy versus zombie firms, dismal productivity and climbing debt — Keynes and Hayek argued this in the 1930s.
- Friedman. You cannot fool people every round; expectations adapt. This produced independent central banks and inflation targets — which worked, and then worked too well.
- On MMT. Not new: the post-war era thought the same. The danger is political learning, because a central bank cannot print cars or nurses. But with expectations at zero and globalisation suppressing wage demands, Vartiainen forecasts no inflation this decade.
Watch
The recording lives on the Neuvottelija channel: Uusklassinen taloustiede ja historia | Juhana Vartiainen | Neuvottelija 46. A Finnish edition of this episode is published at www.neuvottelija.fi.
People and topics
Guests: Juhana Vartiainen