ONE Toward the Next Economics – Peter F. Drucker on Nonprofits and the Public Sector


Toward the Next Economics

IN ITS FOUR-HUNDRED-YEAR HISTORY economics has passed through four major changes in its world view, its concerns, its paradigms. It is now in the throes of another, its fifth “scientific revolution.”

Economics today is very largely “The House that Keynes Built.” Even in the English-speaking world only a minority of economists are Keynesians in their specific theories. But the great majority, perhaps even in the Communist countries, are Keynesians in their “mind-set,” in what they see and consider important, in their concerns, in their basic assumptions. They tend to define themselves largely through their relationship to Keynesian economics, are “near Keynesians” or “non-Keynesians” or “anti-Keynesians.” Their terminology—Gross National Product, for instance, or money supply—assumes the economic aggregates on which Keynesian economics is based. The views of economic activity, economic policy, economic theory which Keynes around 1930 propounded—or at least codified—have, fifty years later, become the familiar environment, the home-ground of economists regardless of persuasion. The Keynesians may not muster the biggest battalions. But they have occupied the commanding heights and thereby define the issues.

Yet both as economic theory and as economic policy Keynesian economics is in disarray. It is unable to tackle the central policy problems of the developed economies—productivity and capital formation; indeed, Keynesian economics must deny that these problems could even exist. Nor is it able to provide theory that can encompass, let alone explain, observed economic reality and experience. And it has been proven to be entirely irrelevant to the economic needs and challenges of developing Third World countries, if not harmful to them.

Indeed, the two theoretical approaches which alone during these last ten or fifteen years have shown consistent predictive power are both incompatible with the Keynesian model: the theories of the Canadian-born Columbia University economist Robert Mundell, and those of the “rational expectations” school. Mundell, after thorough empirical studies, concluded more than ten years ago that Keynesian policies do not work in the international economy. He correctly predicted the failure of currency devaluations to correct the balance of payments, stem inflation, and improve competitive position. The “rational expectations” school goes even further; it postulates that governmental, that is, macro-economic, intervention is not just deleterious; it is futile and ineffectual.

But these new approaches are equally incompatible with pre-Keynesian theories, whether Neo-Classic or Marxist. What makes the present “crisis of economics” a genuine “Scientific Revolution” is our inability to go back to the economic world view which Keynes overturned. To be sure, most of the economic theorems, economic methodologies, economic terms found in the textbooks today will be found in the textbooks tomorrow. They will only be reinterpreted—the way quantum physics reinterprets Newton’s Optics. After all, Keynes did not discard a single theorem of classical economics. He even retained “Say’s Law,” according to which savings always equal investments; it became a “special case.” And one of the most advanced tools of modern economics, Input-Output Analysis, goes back to the first attempt at economic analysis, the Physiocrats’ Tableau Economique more than two centuries ago. But as economic world view, or as economic system, the earlier theories—e.g., the disciplined orthodoxy of the “Austrians”—will not do. What made Keynes so compelling fifty years ago even to a doubter (as I must confess myself to have been even then) was the new vision he forced on us; we suddenly had to see a whole new reality—and that reality is still with us and will not disappear. The Next Economics will be “post-Keynesian.” It cannot ignore Keynes, but it will have to transcend him.

There may be no “Economics” in the future. Totalitarian regimes, while greatly concerned with the economy, do not tolerate the postulate on which any discipline of economics must base itself: economic activity, though constrained and limited by non-economic rationality, concerns, and values, constitutes a discrete and separate sphere. Totalitarian regimes cannot accept economic activity as autonomous, internally consistent, and “zweckrational” within its boundaries. In a totalitarian regime, economics inexorably becomes a branch of accounting.

But if there is a future economics, it will differ fundamentally from the present one. We do not yet know what the economic theories of tomorrow will be. But we do know what the main problems, the main concerns, the main challenges will be. We do not know the Next Economics; but we can outline its specifications.


To do this, we have to look paradigmatically—that is, as methodologists rather than as economists—at the economic world views underlying the four “Scientific Revolutions” in economics that preceded the one in which we find ourselves, and especially at the basic world view and at the assumptions of the last, the Keynesian system.

Economics begins with the Cameralists and Mercantilists of France in the first half of the seventeenth century. They first saw the economy as autonomous. Earlier there was no economics, however great the concern with trade and livelihoods, with wealth, coinage, and taxes. As a system, a world view, Mercantilism was macro-economic and its universe was a political unit, the territory controlled by the Prince. Indeed the definition of the “national state,” as it emerged at the end of the sixteenth century, was essentially an economic one: the unit controlled by the Prince through his control of coinage and foreign trade. Mercantilism was supply-focused economics. To produce the largest possible export surplus, and with it the hard currency needed to pay professional soldiers, was its central concern.

Despite its preoccupation with supply, Mercantilism failed however to produce it. Mercantilism collapsed as a system in what we would today call a “productivity crisis.” The more the French government promoted manufacture for export and for the generation of specie, the poorer the country became—especially by contrast with the non-mercantilist, unsystematic, and unscientific English across the Channel. At the same time, Mercantilism also failed to spur capital formation. There were few economic statistics in those days other than foreign trade figures, the price of bread, and tax receipts; but there is no doubt that the French savings rate dropped sharply, while savings in non-mercantilist England steadily went up.

The Physiocrats started their “Scientific Revolution” with the paradox that under Mercantilism Europe’s “richest country,” France, had become one of its poorest ones, and was becoming the more wretched the more specie it earned. They solved the paradox by applying Gallic logic to Anglo-Saxon pragmatism. Their system remained as much supply-focused as was that of the Mercantilists. But they turned micro-economist, with the individual piece of land and its cultivator the economic unit. This then forced them into the first economic theory of value—that is, the first theory that did not equate “wealth” with “money.” The Physiocrats’ source of value was nature in its economic manifestation, that is, land as producer of human sustenance. With this economics had become genuinely autonomous, had become a “discipline.”

Classic Economics—the third of the economic world systems—took from the Physiocrats both the concern with supply and the focus on micro-economics. But it shifted the theory of value from “nature” to “man.” With the Labor Theory of Values, economics became a “moral science.” It is to this, as much as to its success in producing wealth, that Classic Economics owed its success and its rapid rise as the star amongst the new disciplines. But very soon, by the time of the mature John Stuart Mill in 1850 or so, the Labor Theory of Values became an impediment and the cause of serious theoretical turbulence.

This underlay the third of the Scientific Revolutions, the one that occurred in the second half of the nineteenth century: the shift from Classic to Neo-Classic economics, from the disciples of Ricardo to Leon Walras in Belgium and the Austrian pioneers of marginal utility. The shift was primarily philosophical. The Neo-Classics shifted from “value” to “utility.” They shifted from human needs to human wants. They shifted from economic structure to economic analysis. To a non-economist this may not seem like a major shift, and may hardly deserve the name “Scientific Revolution.” But it introduced a new spirit that has animated economics and economists alike to this day.

This third Scientific Revolution also split economics. Marx and the Marxists refused to abandon the Labor Theory of Value. This then forced them to spurn economic analysis. And they were forced also to subordinate economics to non-economic “historical forces.” The Classics’ micro-economics, with its built-in equilibrium, they asserted, would work only if and when meta-economic obstacles to labor’s obtaining its full share of the social product would have been removed through political upheavals generated by the system’s “economic contradictions”—or, as Lenin later redefined it, by the system’s “political contradictions.” Then the state would wither away, then micro-economics would take over: then there would be equilibrium.

Seen against the paradigmatic background of economics, Keynes was indeed right in the claim he voiced in his Cambridge seminar in the thirties that his economics represented a far more radical break with tradition than Marx and Marxism. Keynes not only went back to the Mercantilists in being macro-economic. He stood all earlier systems on their heads by being demand-centered rather than supply-centered. In all earlier economics, demand is a function of supply. In Keynesian economics, supply is a function of demand and controlled by it. Above all—the greatest innovation—Keynes redefined economic reality. Instead of goods, services, and work—realities of the physical world and “things”—Keynes’ economic realities are symbols: money and credit. To the Mercantilists, too, money gave control—but political rather than economic control. Keynes was the first to postulate that money and credit give complete economic control.

The relationship between the “real” economy of goods, work, and services, and the “symbol” economy of money and credit had been a problem since earliest times. Few economists were satisfied with the way the Classics (following the Physiocrats) dismissed money as the “veil of reality.” Well before Keynes, economists of stature, e.g., MacCulloch, otherwise a devout Ricardian, or, in the generation before Keynes, the Swede Karl Gustav Cassel and the German Georg Friedrich Knapp, had attempted to replace a thing-based economics with a symbol-based one. But it was Keynes’ observation that in the recession of the 1920s the English labor unions treated money wages as “real” and as “income,” even when this actually resulted in lower purchasing power for their members, that then produced a genuine “Scientific Revolution.” In Keynesian economics commodities, production, work, are the “veil of reality.” Or, rather, these things are determined by monetary events: money supply, credit, interest rates, and governmental surpluses or deficits. Goods, services, production, productivity, demand, employment, and finally prices, are all dependent variables of the macro-economic events of the monetary symbol economy. Philosophically speaking, Keynes became an extreme nominalist—it was perhaps not entirely coincidence that he and Wittgenstein were contemporaries at Cambridge.

Looked at paradigmatically, Milton Friedman is as much a “Keynesian” as the Master himself, rather than the “anti-Keynesian” as which he is commonly depicted. Friedman accepts without reservation the Keynesian world view. His economics is pure macro-economics, with the national government as the one unit, the one dynamic force, controlling the economy through the money supply. Friedman’s economics are completely demand-focused. Money and credit are the pervasive, and indeed the only, economic reality. That Friedman sees money supply as original and interest rates as derivative, is not much more than minor gloss on the Keynesian scriptures. It is “fine-tuning” Keynes. And what has made Friedman stand out is not so much his monetary theory as his insistence on economic activity as being autonomous, on economic values as the hinge on which economic policy and behavior must turn, and on the free market—on all of which Keynes himself would have been in full agreement.

To Classics, Neo-Classics, and Marxists, the Great Depression of the 1930s originated in the “real economy,” in the impoverishment of Europe in World War I, further aggravated by Reparations and by a sharp drop in the productivity of European agriculture and industry. To a Keynesian, however, including Friedman, the Great Depression was the result of the Stock Exchange crash of 1929, of “speculation,” or of a contraction in the money supply, that is, of events in the symbol-economy.


The present “crisis in economics” is a failure of the basic assumptions, of the paradigm, of the “system,” rather than of this or that theory. Keynesian economics has run into the most severe productivity crisis since that of France in the eighteenth century which discredited Mercantilism. This productivity crisis in all developed countries—and worst in the two most faithfully Keynesian countries, Great Britain and the United States—invalidates the Keynesian theorem of the demand-control of supply. The crisis in capital formation which we are facing at the same time—again at its worst in Great Britain and the United States—could not, within Keynesian economics, have happened at all; it is theoretically impossible within the Keynesian paradigms.

Keynes was fully aware of the importance of productivity. But he was also convinced that productivity is a function of demand and determined by it. In the early thirties, the great years of the Keynes seminar in Cambridge, one heard again and again of Keynes being asked by one of the first-rate minds in the seminar, Joan Robinson perhaps or Roy Harrod, or Abba Lerner, “What about productivity?” He always answered: “We can take productivity for granted, provided that employment and demand remain high.”

The Classics had not taken productivity for granted. On the contrary, central to classical economics is the “law” of the diminishing return of all resources. Marx had based his forecast of the imminent demise of the “bourgeois system” (the term “capitalism” was not coined until after Marx’s death) on this axiom. What made Marx different was only his meta-economic, semi-religious belief that the end of “alienation” would release such enormous human energy as to reverse the diminishing return on resources in an outburst of “creativity.” But just when Marx, in the last unfinished volume of Das Kapital, most confidently predicted the demise of the “system” because of its inherent productivity crisis, productivity began to go up sharply. In part this was the result of the systematic approach to work, first developed by Frederick W. Taylor in his “Task Study” (only later misnamed “Scientific Management”),* which showed that human work can be made infinitely more productive, not by “working harder” but by “working smarter.” In part this was the result of the great age of innovations, both in technology and in business and management (e.g., installment buying), as a result of which resources were systematically shifted from older and less productive into newer and more productive employments. In large part, the rise in productivity was the result of steady work on making resources—especially capital—more productive. The greatest productivity increase in the last hundred years has probably not been in the factory, but in commercial banking, where one dollar of assets today supports at least a hundred times the volume of transaction it supported a hundred years ago—and without any release of “creativity” or any great innovation. At that time—that is, in the decades around 1900—the developed countries learned to use capital not to replace labor, but to upgrade it and to make it more productive, as Simon Kuznets of Harvard has shown in his pioneering studies for which he received the Nobel Prize in Economics. Altogether, the reversal of the theory of productivity between 1900 and 1920 from one that postulated a built-in tendency toward diminishing returns to one that postulated a steady increase, was a major factor in the Keynesian “Scientific Revolution.” It made possible, in large measure, the shift from supply-focus to demand-focus, that is, to the belief that production tends inherently to surplus rather than to scarcity.

It was thus not totally frivolous to assume as Keynes did, fifty years ago, that productivity would take care of itself and would continue to increase slowly but steadily, if only economic confidence prevailed for both businessmen and workingmen, if only demand kept high and unemployment low. In the early thirties Keynes’ was a rational—albeit optimistic—view (though even then Joseph Schumpeter and Lionel Robbins could not accept it).

But surely this can no longer be maintained. And yet within the Keynesian system there is no room for productivity, no way to stimulate or to spur it, no means to make an economy more productive. With productivity emerging as a central economic need and problem, especially in the most highly developed countries—and a need alike in manufacturing, in services, and in agriculture—the Keynesian inability to handle productivity within the theoretical structure or within economic policy is as serious a flaw as was the inability of Ptolemaic astronomy around the time of Copernicus to explain the motion of stars and planets.

For economic theory, the decline in capital formation in the developed countries, and especially in the countries of the Keynesian true believers—that is, in the United States and Great Britain—is even more serious. Within Keynesian economics the decline cannot be explained, cannot have happened.

Capital is the future. It is the provision for the risks, the uncertainties, the changes, and the jobs of tomorrow. It is not “present” cost—but it is certain cost. An economy that does not form enough capital to cover its future costs is an economy that condemns itself to decline and continuing crisis, the crisis of “stagflation,” in which—an impossibility for both Neo-Classics and Keynesians—there is simultaneously both high unemployment and inflation.

The essence of Keynesian economic theory, as every undergraduate is being taught, was the repudiation of “Say’s Law,” according to which Savings always equal Investment, so that an economy always forms enough capital for its future needs. Keynes postulated instead a tendency toward “over-saving” for developed economies. “Under-saving,” that is, a shortfall in capital formation, cannot possibly occur in a developed economy according to the Keynesian postulates. From the beginning this was seen as a serious flaw in Keynesian economics by such thoughtful (and sympathetic) critics as Joseph Schumpeter, Surely, once it is accepted that savings and investment need not be identical, “under-saving” is just as likely as “over-saving.” And what we have had in the last thirty years in the English-speaking, developed, that is, the Keynesian, countries—beginning well before the energy crisis—is “under-saving” on a massive scale. The basic assumption underlying the Keynesian paradigm can therefore no longer be held or defended. Within the Keynesian economic universe, however, capital formation cannot be dealt with. Keynesian economics explicitly excludes the possibility of under-saving, and thereby of inadequate capital formation. And if capital is a true “cost” of the economy—and even Keynes never doubted this—demand-based macro-economics cannot adequately deal with economic theory or economic policy.

Even the Keynesian assertion that consumer demand can be managed by managing money incomes and interest rates macroeconomically is not supported by the experience of the last forty years. The one example which the Keynesians always cite for the success of their approach, the “Kennedy tax cut” of the early sixties, proves nothing. The American economy did indeed experience a significant upturn in the year in which the Kennedy administration cut federal taxes. But in that same year state and local taxes in the United States went up so sharply as to offset the federal tax cut. There is nothing in Keynesian theory or in economic reality that would explain why state and local taxes differ in their economic impact from federal taxes.* And the other examples of the effect of Keynesian policies actually disprove the claim that the economy can be managed macro-economically through the stimulus of lower interest rates or larger government deficits. Both in the New Deal years in the United States and in those of the British “stagflation” since 1960, larger government deficits failed to stimulate supply. Their effect was nullified by micro-economic sabotage, that is, by a sharp slowing down of the velocity of money-turnover and by a drop in investment—neither of which could have happened if macro-economics really determined micro-economic attitudes, behavior, and actions, as Keynes postulated.

Even more serious may be the failure of the basic philosophical foundation of Keynesian economic policy: the belief in the “economist-king,” the objective, independent expert who makes effective decisions based solely on impersonal, quantitative, unambiguous evidence, and free alike of political ambitions for himself and of political pressures on him. Even in the 1930s, a good many people found it difficult to accept this. To the Continental Europeans in particular, with their memories of the postwar inflations, the economist-king was sheer hubris—which in large measure explains why Keynes has had so few followers on the Continent until the last ten or fifteen years. By now, however, few would altogether swallow the non-political economist who, at the same time, controls crucial political decisions. Like “enlightened despots,” the Keynesian “economist-king” has proven to be a delusion, and indeed a contradiction in terms. If there is one thing taught by the inflations of the last decade—as it was taught in the inflations of the twenties in Europe—it is that the economist in power either becomes himself a politician and expedient, if not irresponsible; or he soon ceases to have power and influence altogether. It is simply not true, as is often asserted, that economists do not know how to stop inflation. Every economist since the late sixteenth century has known how to do it: cut government expenses and with them the creation of money. What economists lack is not theoretical knowledge. It is political will or political power. And so far all inflations have been ended by politicians who had the will rather than by economists who had the knowledge.

Without the “economist-king,” Keynesian economics ceases however to be operational. It can play the role of critic, which Keynes played in the 1920s and which Milton Friedman plays today. In opposition, the Keynesian economist, being powerless, can also be politics-free. But it is an opposition that cannot become effective government. The Keynesian paradigm is thus likely to be around a long time as a critique and as a guide to what not to do. But it is fast losing its credibility as a foundation for economic theory and as a guide to policy and action.


That there is both a productivity crisis and a capital-formation crisis makes certain that the Next Economics will have to be again microeconomic and centered on supply. Both productivity and capital formation are events of the micro-economy. Both also deal with the factors of production rather than being functions of demand.

We know a good deal about productivity and capital formation. A vast amount of empirical and of theoretical work has been done in either area these last thirty years. Productivity, we know, means both the economic yield from every one of the factors of production: the human resource, capital, physical resources, and time; and the overall yield of the joint resources in combination. Capital formation, we know, has to be at least equal to the cost of capital. And in a growing economy, the costs of the future to be covered by today’s capital formation are substantially higher even than the cost of capital. In a growing economy, tomorrow’s jobs, by definition, will require substantially higher capital investment than today’s jobs, and will thus require substantially greater capital formation than the replacement of capital represented by the prevailing return rate for capital. And we know how to determine the rate of capital formation needed for the uncertainties of the future within a margin of error that is not greater than that which pertains to such accepted costs of the present in the accounting model as depreciation or credit risks.

We also know quite a bit about the factors and forces which encourage both greater productivity and greater capital formation. None of them, it should be said, is a factor of the “symbol economy” of money and credit. Events in the symbol economy can discourage, but are unlikely significantly to encourage either productivity or a higher rate of capital formation.

But while we have both the concepts and the data, we do not however have, so far, a micro-economic model that embraces productivity and capital formation. Even the terms are largely unknown to the available theories, e.g., the Theory of the Firm, which is the micro-economics most commonly taught in our college courses. Instead of productivity and capital formation, the Theory of the Firm talks of “profit maximization.” But we have known for at least fifty years that “profit maximization” is a meaningless term if applied to anything other than a unique, non-recurrent trading transaction on the part of an individual and in a single commodity, that is, to an exceptional, rare, and quite unrepresentative incident. Altogether the Next Economics in its micro-economics will, almost certainly, discard the concept of “profit.” It assumes a static, unchanging, closed economy. In a moving, changing, open-ended economy, in which there is risk, uncertainty, and change, there is no “profit,” except—as Schumpeter taught seventy years ago—the temporary profit of the genuine innovator. For any other economic activity there is only cost—the costs of past and present, which are embodied in the accounting model, and the costs of the future expressed in the cost of capital. Indeed, no business is known to apply “profit maximization” to its planning or to its decisions on capital investment or pricing. The theories and concepts that govern the actual behavior of firms are theories of the cost of capital, of market optimization, and of the long-range cost gains (the “learning curve”) from maximizing the volume of production rather than from maximizing profitability.

The next Economics will thus require radically different microeconomics as its foundation. It will require a theory that aims at optimizing productivity; for a balance of several partially dependent functions is, of necessity, an optimization rather than a maximization. Capital formation requires a minimum concept: the coverage of the cost of capital. It requires a theory that aims at “satisficing” rather than at maximizing profit (though the minimum cost of capital will, paradoxically, be found to be substantially higher than what most present-day economists and most business executives consider the available maximum profitability—which is, of course, why there is a “capital formation crisis”). The next micro-economics, unlike the present one, will be dynamic and assume risk, uncertainty, and change in technology, economic conditions, and markets. Yet it should be equilibrium economics, integrating a provision for an uncertain and changing future into present and testable behavior. Much of the spadework for this has already been done—in part, fifty years ago, by the Chicago economist Frank Knight; in part by the contemporary English economist G. L. S. Shackle. The next micro-economic theory should thus be able to resolve the dilemma that has plagued economists since Ricardo, almost two hundred years ago: economic analysis is possible only if it excludes uncertainty and change, and economic policy is possible only in contemplation of uncertainty and change. In the next micro-economics, we should be able to integrate both analysis and policy in one dynamic equilibrium through productivity and capital formation.

If productivity and capital formation are its focal points, a micro-economic theory can also do what never before could be done in economics: to tie together micro-economics and macroeconomics, if not make them into one. While productivity and capital formation are events of the micro-economy, they are—unlike profit—meaningful terms of the macro-economy as well, and measurable macro-economic aggregates. “Profit,” by definition, applies only to one legal entity, the “entrepreneur” or the “Firm.” But it makes sense to speak of the productivity of an industry or of capital formation in the world economy.

In the past, economic theory was either micro-economic or macro-economic. Alfred Marshall, the last “Classic” economist, tried in the early years of this century to combine the two; but no one, including Marshall himself, thought that he had succeeded. And it was Marshall’s failure, in large part, that made Keynes opt for a purely macro-economic system. The Next Economics will not, it is reasonably certain, have the luxury, however, of choosing between micro-economics and macro-economics. It will have to accomplish what Marshall tried and failed to do: integrate both. Macro-economics has proven itself—for the second time—to be unable to handle supply, that is, productivity and capital formation. Yet micro-economics alone is not adequate either for economic theory or for economic policy in a world of mixed economies, of multinational corporations, of non-convertible currencies, and of governments’ redistributing half of their nation’s income.

But what the term “macro-economy” will actually mean in the Next Economics is anything but clear and will be highly controversial. For four hundred years the term automatically meant the “national economy.” The Germans, to this day, call the discipline of “economics” “Nationaloekonomie” or “Volkswirtschaft.” But the one theory today which attempts to integrate micro-economics and macro-economics, that of Robert Mundell, all but dismisses national government as a factor. Mundell’s macro-economy is the world economy. National governments, in Mundell’s economics, are effective only insofar as they are agents of the world economy, anticipating its structural trends and shaping their own domestic economies to conform; the examples are Japan and Germany in the years of their most rapid growth in the sixties. And the countries that attempted to behave like true “macro-economies” during the post-World War II period—especially the Keynesian countries, Great Britain and the United States—are, as Mundell shows, also the countries that had the least control over their national economies and at the highest cost.

This, by the way, was the conclusion Keynes himself reached for toward the end of his life. Around 1942, Keynes ceased to be a “Keynesian” and abandoned the nation-state as the macro-economy. Instead he proposed to build the postwar economy around “Bancor,” a transnational money that would be independent of national governments and national currencies and managed by non-political economists acting as transnational civil servants. “Bancor” was shot down at the Bretton Woods Conference by the American Keynesians, who suspected it of being an attempt to maintain the Pound Sterling as the world’s “key currency,” but who also were arrogantly confident of the ability of the American dollar to be the world’s “key currency” and of the wisdom of American economists in managing the dollar and in keeping it free from domestic political pressures. But today even the Americans are pushing the “Special Drawing Rights” (SDR) of the International Monetary Fund as the transnational and non-national money of the world economy. Even the Americans have accepted that there can be no “key currency”—that is, that no nation-state can aspire to genuine economic sovereignty. And the major holders of liquid funds in the world economy—the OPEC countries, the major Central Banks, and the very large multinationals based in balance-of-payments surplus countries such as Germany, Japan, or Switzerland—are fast putting their cash into transnational money: the SDRs, a “market basket” of national currencies, money of account indexed to purchasing power, or gold.

And yet it makes sense to speak of a “Brazilian economy” or a “British economy.” The nation-state is a reality. It is not the economic reality, the way traditional macro-economics has it. But it is also not an “extraneous factor,” which can limit economic activity, but cannot determine or direct it. The Next Economics will have to account for this reality. For the national state is surely, for the foreseeable future, the one political institution around.

Predictably, therefore, the Next Economics will, at its center, have a spirited debate over the place of national government in economic theory. One approach might follow Mundell and consider the national government, at least in developed countries, to be no more than a gear in the system rather than its engine. Another approach, predictably, will attempt to maintain the nation-state and its government as the center of the economic universe, with both the macro-economy and the world economy, so to speak, planets in orbit around it. There may even be two parallel theorems of such a “Ptolemaic,” “nation-centered” economic system, an Anglo-American and Neo-Keynesian one, and a French and Cameralist one—one approach attempting to maintain control and uniqueness of the national economy through money and credit, and the other one controlling through what the French call “indicative planning,” that is, through allocation of capital, labor, and physical resources. There may be—methodologically there almost has to be—a further approach which tries to organize the three centers in one system, the micro-economics of the individual and the firm, the intermediate economics of the nation-state, and the macroeconomics of the world economy. This, I would think, might be the only model adequate for developing countries, and especially for rapidly industrializing ones. In any event, the Next Economics will surely again be “political economy,” with the question of the relationship between economic realities, that is, world economy and micro-economy, and political realities, that is, the nation-state, both central to economic theory and highly controversial.

Equally central, and perhaps even more controversial, will be the relationship between the “real economy” of things: commodities, resources, work, and the “symbol economy” of money and credit. There is no returning to the old dismissal of the symbol economy as the “veil of reality.” But there is no holding on to the recent orthodoxy in which the symbol economy is the real and true economy, with things: commodities, services, and work, only “functions” and indeed totally dependent functions, of the “symbol economy.”

We may have to be content, however, with something analogous to the physicist’s “Uncertainty Principle,” in which the only meaningful statements in respect to certain events—productivity, for instance, capital formation, the allocation of resources, and so on—are statements in terms of the “real economy,” with events in the “symbol economy” a restraint and a boundary only. But other and equally “real” events can perhaps only be discussed, analyzed, and even described in terms of the “symbol economy,” with the “real economy” of things being a restraint on them. This would not be particularly satisfactory—but it may be the best we can achieve.


No one today can predict whether the Next Economics will be designed by one great thinker, another Adam Smith, a Ricardo, or a Keynes; or whether it will emerge in a gradual shift, resulting from the work of a great many competent people, as did the shift from the Classic to the Neo-Classic Economics of marginal utility a century ago. The Next Economics may be a massive tower reared on one intellectual foundation, similar to the edifice Keynes designed half a century ago. Or it may be sprawling suburbia without a center, held together only by a number of busy super-highways. But the Next Economics will, of necessity, have to embody what in the history of economic thought were always discrete alternatives, if not opposites: micro-economy and macro-economy; the real economy of commodities and work and the symbol economy of money and credit. It will use for its building blocks the economic thought and the economic theories of the entire four hundred years of the history of economics; but it is quite unlikely to accept any one of them either as foundation or as capstone.

And the Next Economics may even attempt again to be both “humanity” and “science.”

An anecdote popular among the younger members of Keynes’ Cambridge seminar in the thirties had one of the disciples ask the Master why there was no Theory of Value in his General Theory. Keynes was said to have answered: “Because the only available Theory of Value is the Labor Theory, and it is totally discredited.” The Next Economics may again have a Theory of Value. It may proclaim that productivity—that is, knowledge applied to resources through human work—is the source of all economic value.

Productivity as the source of value is both a priori and operational, and thus satisfies the specifications for a first principle. It would be both descriptive and normative, both describe what is and why and indicate what ought to be and why. Marx, as the “Revisionists” of socialism around 1900 used to argue, was never fully satisfied with the Labor Theory of Value, but groped in vain for a substitute. None of the great non-Marxist economists of the last hundred years, Alfred Marshall, Joseph Schumpeter, or John Maynard Keynes, was in turn comfortable with an economics that lacked a Theory of Value altogether. But, as the Keynes anecdote illustrates, they saw no alternative. Productivity as the source of all economic value would serve. It would explain. It would direct vision. It would give guidance to analysis, to policy and behavior. Productivity is both, man and things; both structural and analytical. A productivity-based economics might thus become what all great economists have striven for: both a “humanity,” a “moral philosophy,” a “Geisteswissenschaft”; and rigorous “science.”

First published in The Crisis in Economic Theory, a special 1980 issue of The Public Interest.