Macroeconomic Instability and Coordination

Macroeconomic Instability and Coordination

Selected Essays of Axel Leijonhufvud

Economists of the Twentieth Century series

Axel Leijonhufvud

Axel Leijonhufvud has made a unique contribution to the development of macroeconomic theory. This volume draws together his insightful essays dealing with the extremes of economic instability: great depressions, high inflation and the transition from socialism to a market economy. In several of the papers, Leijonhufvud brings a neo-institutionalist perspective to the problems of coordination in economic systems.

Chapter 13: Capitalism and the factory system

Axel Leijonhufvud

Subjects: economics and finance, history of economic thought


Economic theorizing utilizes, on the one hand, mathematical techniques and, on the other, thought experiments, parables or stories. Progress may stagnate for various reasons. Sometimes we are held back for lack of the technique needed to turn our stories into the raw material for effective scientific work. At other times, we are short of good stories to inject meaning into (and perhaps even to draw a moral from) our models. One can strive for intellectual coherence in economics either by attempting to fit all aspects of the subject into one overarching mathematical structure or by trying to weave its best stories into one grand epic. This chapter attempts to revive an old parable, Adam Smith’s theory of manufacturing production, which has been shunted aside and neglected because it has not fitted into the formal structure of either neoclassical or neo-Ricardian theory. The discussion attempts to persuade, not by formal demonstrations (at this stage), but by suggesting that the parable can illuminate many and diverse problems and thus become the red thread in a theoretical tapestry of almost epic proportions. The subject may be approached from either a theoretical or a historical angle. Regarding the theoretical starting point, it is possible to be brief since the familiar litany of complaints about the neoclassical constant-returns production function hardly bear repeating. The one point about it that is germane here is that it does not describe production as a process, that is, as an ordered sequence of operations. It is more like...

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