| Abstract: | Summary Analytical frameworks useful for the exploration of processes developing in any given environment are significantly simplified
constructs in the nature of short-cuts within the boundaries of far more comprehensive theoretical systems. The more comprehensive
systems retain their crucial importance because of the recurring need to adjust and to reconstruct the short-cuts employed.
Monetarism is a short-cut the interest in which has been spreading in an environment influenced bycountercurrents against what Schumpeter called the March Into Socialism, defined by him as a transition into a system in which all important
economic decisions are made by the political authority. The monetarist short-cut has passed some performance tests reasonably
well in economies in which only a few important variables are politically controlled. The monetarist approach is best interpreted
as relating to the determination of nominal demand, hence, as bearing only indirectly on trends in costs, prices and in real
magnitudes.
New developments in the theory of expectations have also been in spired by countercurrents against the Schumpeterian March
Into Socialism. This is because, regardless of the process by which nominal demand is determined, it is true particularly
of free-market economies, that market expectations play a decisive role in determining the cost and price trends that develop,
given the trends in nominal demand. Unrealistic assumptions concerning market expectations have turned out to be the most
vulnerable element of the postwar period’s neo-Keynesian analytical constructs. While the package of propositions usually
associated with the concept of rational expectations also contains unconvincing elements, the views underlying those propositions
contain a valid and significant core which I prefer to describe as the credibility hypothesis. The most important policy conclusion
following from this hypothesis is that market expectations can be conditioned to a firm and reasonably predictable policy
posture and that there is a large difference between the efficiency of an economy in which this condition is met and one in
which it is not.
Basic political-sociological forces will decide whether analytical constructs focused on problems of essentially free market
economies, such as those discussed in this paper, will retain their pragmatic significance. This is because it will depend
on these basic forces whether Schumpeter’s prognosis about the march into a bureaucratic and politically directed economic
system will prove realistic or whether he underestimated the strength of the countercurrents with which the recent spread
of interest in the approaches I have discussed is connected. At least for the time being, the countercurrents seem to have
acquired considerable importance in several major economies. Let us remind ourselves also of a qualification that Schumpeter
added in the Preface to the second and later editions of Capitalism, Socialism and Democracy. That qualification does not
seem to have had much influence on his own betting odds, but he nevertheless stated it very clearly: “The report that a given
ship is sinking is not defeatist. Only the spirit in which this report is received can be defeatist: The crew can sit down
and drink. But it can also rush to the pumps”. |
