Baloghian Economics

With such a colourful and energetic background, why is Balogh so relatively unknown today? Why also would no more than a handful of contemporary economists have heard of ‘Baloghian economics’, still less be able to describe it? What lasting impact, either for good or ill, did this talented and controver­sial economist make? Also, for what ought he to be remembered? For today’s mainstream economists, the answer is simple enough.

Even Keynes did not escape. In 1945, notwithstanding their earlier friend­ship, there was a furious row. Balogh took issue with Keynes over the Bretton Woods Agreement, daring to disagree with him in talks, articles, pamphlets and letters to The Times. He even took on Keynes indirectly in the House of Lords by briefing three out of the four who spoke against what Keynes was recommending. In addition to this argument, Balogh criticised Keynes more generally over the neglect of the international dimension of his theory.

His disagreements with the neo-Keynesians went even deeper, the venom made more bitter by his acute sense of a missed opportunity. Keynesian eco­nomics, he believed, had offered a brief period of hope. In Balogh’s view, Keynes had laid out a theory in which the three central “propensities” around which the structure of The General Theory rotates—to save, to invest and to hold liquidity—were all social psychological characteristics, not laws.^[99] Moreover, Keynes's framework not only allowed the monetary and real sectors of the economy to interact, as Balogh believed all historical evidence sug­gested, but also did so without laying down rigid pathways of causation.

However, to Balogh's great regret, Keynes's mobile and suggestive form of theorising was rapidly replaced by formal models. Amongst economists, Hicks, who froze Keynes's potentially open-ended system into a set of simul­taneous equations in his IS-LM curves, was the subject of particular attack. So also were Phillips and Paish and their followers, with their claim of a stable relationship between the level of unemployment and the rate of inflation. In both cases, Balogh's central critique was that economic relationships were pre­sented as if the economy were a machine (instead of the evolving organism which he saw it to be).

Balogh was equally scathing of politicians, especially those on the Gaitskellite wing of the Labour Party who swallowed the textbook version of Keynesianism more or less whole. Tony Crosland's influential book, The Future of Socialism (Crosland 1956), was a particular source of irritation. Balogh never believed, as Crosland did, that all the main economic problems could be largely solved provided only that there continued to be a relatively small amount of intelligent fiscal and monetary manipulation. In particular, in Balogh's view, in the absence of an incomes policy, either full employment had to be abandoned as a goal, or inflation would not only persist, but also gradually increase—as, indeed, it did. Investment, Balogh also thought, would never be a sufficient share of gross domestic product (GDP) if it were to be left largely to the market.

However, for Balogh, if the neo-Keynesians were bad, monetarists were much worse. For them, the economic levers did not even have to be pulled. Once the dials had been set, they expected the economy to run on autopilot, at worst deviating only “temporarily” from the “natural” rate of unemployment. In this, Balogh accused them of a double error. First, they were wrong even to suppose that the dial could be set. Thus, sometime around 1970, I recall him saying, ‘You can't control vot you also measure—ze buggers vill change'.

assumption that he regarded as not only totally without theoretical support, but also at odds with all the historical evidence of substantial trade cycles.

Is it right to say that Balogh was ‘infuriated’? Definitely. To Balogh, what mattered about economics was that it held such power for good or evil over people’s lives. This was no academic game. What made him mad about the monetarists was that he felt, and felt passionately, that they were misleading everyone. The solutions they advocated would not be painless, far from it, nor would the difficulties be merely temporary, as their theory implied. Indeed, they would not, in his view, be solutions at all.

For Balogh, neoclassical economics presented exactly the same Panglossian optimism. Again, it was influential and therefore potentially dangerous and based on assumptions, which to him, were so obviously wrong that he found it hard to understand how anyone could take such theories seriously. How, he asked, could the everyday observation that, in the great majority of industries, firms were in the driving seat as price-setters, not price-takers, be squared with a theory which assumed precisely the opposite? Why, equally, were all the models static, when the history of capitalism displayed dramatic change? Why was technology normally ignored? Or, if technical progress was recognised, why was it so frequently assumed to be “disembodied”, descending neutrally like manna from heaven? On and on the questions went.

The replies, both old and new, are well known. Then, it would have been said in defence that all theories are abstractions, one has to start from some­where and what matters is not whether a theory is right (an impossible test), but whether it is illuminating. Today, it might be conceded that many of Balogh’s points were well taken, but the reply would be that others had made the same criticisms with greater clarity and that, in any case, such criticisms were of the early textbook models, when the subject was young and naive. Indeed, the responders might well add that Balogh’s observations were pre­cisely why the subject had had to become more technical.

The crunch point, both then and now, is the question: What is the alterna­tive? After all, even Paul Streeten, one of Balogh’s closest of allies, has con­ceded that ‘it takes a model to kick out a model’ (P Streeten quoted in H. Streeten 1986: 8). Here we come to the nub of the issue. Was Balogh, despite his phenomenal energy and his obvious talents, not really an econo­mist to be taken seriously; an intemperate and acute critic of others, but with nothing significant to add in the longer run? Or are his methods, his observa­tions and his contributions of enduring interest and significance?

These questions cannot be answered without discussing the fundamental nature of economics. If the subject is a science with discoverable laws that can be modelled mathematically then Balogh has no place because he has no alter­native theoretical framework to offer. The best that can be hoped is that his criticisms will lead to small amendments to mainstream theory. Far more likely, however, is that his critical observations, not being easily related to the existing framework, will be disregarded. There is, as Wittgenstein said, a ‘con­temptuous attitude towards the particular case' (Wittgenstein 1958: 18).

Conversely, if, as Balogh argued, economics, despite its apparent ability to quantify so many things, is not a science based on the belief that there are underlying laws about human behaviour to be discovered, then the picture shifts markedly. Theory no longer holds pride of place at the centre of the cita­del, the hard core that has to be protected in its constant skirmishes with the facts. Instead, careful observation is what drives the subject and induction, the process of generalising from such observation, replaces deduction as the pri­mary skill. Economists would then need an education which encompassed history and social psychology, and, above all, to value the ability of the detec­tive higher than that of the mathematician.

Seen from the second viewpoint, I suggest that Balogh's observations, espe­cially when combined, rather than seen individually, are of more importance than might at first appear. They offer both a useful set of organising insights and a coherent critique of mainstream theory.

Amongst the inductive generalisations that Balogh emphasised were the prevalence of economies of scale, oligopolistic industry, firms as price-setters, poor information, the uneven incidence and take up of technology and the fallibility of human expectations. Taken individually, each of these is a criti­cism of one part of existing theory, but, taken together, they offer a different perspective. If economies of scale are widespread, if information is poor and if the incidence of technology is not random, then many industries are likely to be oligopolistic. If oligopoly is prevalent, then firms will be price-setters, not price-takers, and mark-up pricing may well be the norm. If prices are deter­mined mainly by costs, and costs are L-shaped in the short run, then demand will almost certainly have its main influence not on prices, but on output, profits and investment.

Moreover, at the centre of Balogh's view of the world lies the elusive con­cept of power. The starting points for all his work on international develop­ment were the massive inequalities that exist both between and within countries. On the dedication page of the first volume of Unequal Partners, Balogh cites an 1885 quote by the Indian politician Lala Murlidhar which compares the ‘fairness’ of free trade between ‘impoverished India and the bloated capitalist England’ to a meeting between ‘a rabbit and a boa constric­tor’ (Balogh 1963a: dedication page). To Balogh, the problems in measuring power were irrelevant when, in his view, the results of its existence were mani­fest everywhere.

What is more, if you start within a framework consisting of inequalities of income and wealth and take on board the massive differences in access to power that result, and then add other Baloghian features such as economies of scale, it becomes a relatively trivial matter to construct a convincing story of cumulative causation. Once this is the case, then history matters and multiple equilibria are the norm, not the exception. Also, when history matters, expectations are cen­tral, not the generalised perfect foresight of rational expectations, but the fallible particular foresight of the case-by-case approach. Bygones are then no longer bygones, but the stuff from which the future path of history is made.

Of course, many others have covered this ground and perhaps with greater patience, persuasion and illumination, than Balogh. But not many said all of this so early, nor so consistently, nor, above all, over such a wide range and so forcibly. Moreover, it is not just that Balogh said these things, but also, that he used his insights and used them effectively. This is the litmus test by which a political economist ought to be judged and by which, he, in particular, would want to be judged. As Keynes said describing Marshall’s views, ‘the bare bones of economic theory are not worth much in themselves... The whole point lies in applying them to the interpretation of current economic life’ (Keynes 1924: 342).

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