Review of Political Economy

Chapter 16 of The General Theory contains an analysis designed to interpret the long-run effects of saving decisions and capital accumulation on employment and aggregate income. In a discussion aimed at providing a basis for this analysis, Keynes argued that the concept of roundaboutness—or average period of production—did not provide a general explanation of the origin of the return on capital and was not a general description of capital itself. The alternative view put forward by Keynes described capital as a set of heterogeneous commodities yielding a return according to their scarcity.

This paper discusses Phelps Brown's claims that (1) real wages in the long run cannot be explained by a theory where distribution is determined by the relative worker bargaining position, and (2) changes in real wages would be strictly linked to changes in the average product per worker.

This paper examines the early years of Piero Sraffa's career. Its purpose is to present new information that may improve our undersranding of his life and work and to integrate or rectify what is already contained in the biographical essays published during the fast two decades with new data emerging from his personal papers at the Wren Library of Trinity College and from other—often related—sources.

Sraffa's Lectures on the Advanced Theory of Value 1928-1931 and his two preparatory Notes of summer and November 1927 provide a wealth of material, up to now unpublished, for a reconstruction of the early stage of his inquiry into the cognate fields of pure economic theory and its history. The three manuscripts show that in the late 1920s Sraffa rejected the Marshallian constant-cost interpretation of classical economics, an interpretation to which he had adhered in his 1925 and 1926 papers. Moreover, in the Lectures, Sraffa presents for the first time his own interpretation of classical economics based on the concepts of surplus, physical real costs and asymmetric treatment of distributive variables.

Some writings of the early 1930s by Dennis Robertson and John Hicks present, with a clarity not easily found elsewhere, the reasons why marginalist economists, who until recent decades normally treated capital as a single magnitude, were in fact compelled to do so. This paper focuses on a first reason that emerges from these writings: namely the fact that only this treatment of capital can lend plausibility to the notion of substitutability between factors of production on which the orthodox theory of distribution is built.

This note is an obituary of John Derek Pheby (1949 - 2008), the founding editor of the Review of Political Economy.

The paper documents the gestation of the General Index to Piero Sraffa's edition of The Works and Correspondence of David Ricardo. The available documents suggest that Sraffa made every effort to bring the editorial task he had been entrusted with to completion without sacrificing his standards of precision. They also show that he had good reasons for rejecting earlier versions of the General Index.

The credit crunch of 1966 has long been recognized as the first significant postwar financial crisis, and it was the first verification of the ''financial instability hypothesis'' that Minsky had been developing since the late 1950s. In the midst of the robust post-war expansion, the Fed tightened monetary policy to the point at which profitability of financial institutions was threatened. The Fed was forced to intervene to save the muni bond market, which in effect validated practices that were stretching liquidity. As a result of Fed intervention, the economy continued to expand, new financial practices emerged and were validated, leverage ratios increased, memories of the Great Depression faded, and markets came to expect that big government and the Fed would come to the rescue as needed. That 1966 crisis was only a minor speedbump on the road to Minskian fragility - a transformation from a ''robust'' financial system toward the current ''fragile'' financial system.

In an article in this journal, Edwin Dickens criticizes the financial instability hypothesis of Hyman Minsky. He contends that ''financial instability theorists'' explain the financial crisis in the US in 1966 as due to the forced sale of securities by commercial banks, but that the 1966 crisis was not due to such sales. Therefore, he says that Minsky's financial instability hypothesis is contradicted. In contrast, this article argues that the 1966 crisis was initiated by the sale of securities by banks, but that such a development was not due to increased financial fragility, and thus was not a necessary aspect of the financial instability hypothesis. While the specifics of the 1966 crisis are somewhat of an exception, the general pattern of financial crisis in the postwar period in the US is powerfully explained by Minsky's financial instability hypothesis.

According to Minsky's financial instability hypothesis, financial crises are caused by increasing debt burdens. The purpose of this paper is to argue instead that financial crises are caused by class and intra-class conflict. The 1966 financial crisis is particularly significant, from the perspective of Minsky's financial instability hypothesis, because it divides the postwar Golden Age of US capitalism from the current period of recurrent financial crises. After showing that increasing debt burdens do not account for the 1966 financial crisis, this paper explains the 1966 financial crisis in terms of class and intra-class conflict.

New Zealand has gained considerable international attention for the neo-liberal economic reform programme it enacted from the mid-1980s; this programme has served as a model for similar reform elsewhere. Within the neoclassical framework of the reformers, the programme has produced many improvements to the economy. Such fundamental indicators as lower inflation, lower budget deficits and higher economic growth are cited as evidence of the improved economic conditions. Yet unemployment remains high, real interest rates are among the highest in the world, nominal interest rates and business confidence fluctuate considerably, and the balance of payments is deteriorating. Using a classical framework, this paper examines the neo-liberal reform of the New Zealand economy to see if there are alternative explanations for the persistence of these problems. The methodology developed by Shaikh & Tonak (1994) is used to map official national accounts data to classical economic categories for the 1972 to 1995 period. This approach is compared with earlier attempts at estimating classical economic categories for New Zealand. This classical view of the economic reforms is compared with the conventional view. The paper's main results are that there was a large increase in unproductive economic activity associated with the economic reforms in New Zealand; that the improvement in economic fundamentals emphasised by the reformers reflects this growth of unproductive activity; and that the persistence of other economic indicators is related to the ongoing weakness of productive activity.

The notion that hostile takeovers must play a key role in corporate governance, by bringing purportedly efficient financial market pressures to bear on poorly performing managers, often underlies proposals for financial sector reform. This paper tests the most influential explanation of takeovers, the free cash flow theory of debt-financed restructuring, against a comprehensive sample of large U.S. hostile takeovers from the years 1978-89. The tests provide little support for the free cash flow hypothesis: that over-retention of corporate resources, relative to investment opportunities, would distinguish targets from other companies. Firms with less debt are more likely to have been taken over. But this and closely related evidence is more consistent with the idea that the takeover and credit markets underwent a period of speculative overheating. Thus the role played by hostile takeovers in the corporate restructuring of the 1980s does not suggest that facilitating such activity should be a goal of present day financial reforms, in Europe or elsewhere

Our aim is to understand how the process of transformational growth during the 1990s shaped the boom and bust of the New Economy. From the debate on new technologies and productivity growth, we move on to consider the questions raised by technological developments of the 1990s. Our focus is on the three-way relationship between the development of information and communications technologies, structural change and economic growth, as the key determinants of the cycle of expansion. This brings to the fore the effects of private investment driven by high-technology but we also need to consider the role played by finance and macro policy, and, in particular, the government budget.

This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political autonomy of the central banks in emerging market and developing countries. Our analysis confirms that greater CBA has on average helped to maintain low inflation levels. The paper identifies four broad principles of CBA that have been shared by the majority of countries. Significant differences exist in the area of banking supervision where many central banks have retained a key role. Finally, we discuss the sequencing of reforms to separate the conduct of monetary and fiscal policies. IMF Staff Papers (2009) 56, 263–296. doi:10.1057/imfsp.2008.25; published online 23 September 2008

In this paper, we study the consequences of the 2000-2001 financial crisis in Turkey to identify the impacts of the crisis on capital and labor. We uncover three significant empirical effects of this crisis. First, international capital benefited from the crisis by increasing both its total assets in Turkey and its income flows from these assets, while large domestic financial capitalists also increased their profits in the aftermath of the crisis. Second, industrial capital benefited via a repression of labor. Third, the attempt to 'remedy' the economy by imposing structural changes furthered the interests of capital in general.

Bruce Caldwell (2004) “Hayek’s Challenge” tells the story of the evolution of Hayek’s methodological standpoint. In Caldwell’s account, Hayek is driven by the desire to identify a truly scientific approach to the study of society as a complex adaptive order which at the same time will provide an intellectual basis for the defence of markets and the price system. Starting with ‘Austrian presuppositions’ Hayek’s methodological Odyssey takes him to ‘a place that was unique’. The review commends the knowledge of Hayek and enthusiasm for his subject displayed by the author. The author’s final assessment of Hayek’s contribution, however, damns Hayek with the faintness of its praise. The review criticises Caldwell’s attempt to defend Hayek on the issues of Panglossianism and group selection. Finally, it asks whether Hayek ever did reach his destination, or whether his twin goals remained unreconciled at the end as at the beginning of his pilgrimage.

Robert Aumann and Thomas Schelling won the Nobel Prize in Economic Science in 2005. Their work in game theory shows two different approaches to understanding strategic interaction. Schelling's work on the strategic aspects of negotiations, focal points, and self-command is mathematically informal and is based on experimental and inductive knowledge of players' capabilities. Aumann's work on repeated games and common knowledge is mathematically deductive, and assumes highly rational agents. An exploration of their work allows for a comparison of these two approaches.

Paul Krugman was awarded the 2008 Nobel Prize in Economics 'for his analysis of trade patterns and location of economic activity' (http://nobelprize.org). This article assesses the importance of Krugman's contributions to both the state of our knowledge and methodology as a profession. The focus of the article is on Krugman's contributions to trade theory beginning with Krugman (1979a). This article had a major direct impact on the direction of research on international trade while also containing the seeds of his work 12 years later on economic geography.

This review essay offers a critical assessment of the world economic and social situation through an examination of two recent books by the United Nations. It outlines the contours of the world economic crisis and makes some suggestions about its probable causes. Next, the policy responses to these conditions are critically examined. Finally, it is argued that social progress presupposes economic growth, but economic growth is not a sufficient condition for social progress.

The work of John Kenneth Galbraith provides enduring markers for the economics that still remains to be built. Herewith are brief reflections on the guideposts and the task ahead.

Marx recognized two distinct but also interrelated processes of increasing surplus-value extraction: absolute and relative surplus-value. Both these processes hinge upon the duration, the intensity and the productivity of labour, albeit in different ways. The increase of the duration of labour is indisputably related to absolute surplus-value and the increase of labour productivity to relative surplus-value. However, there is controversy regarding the position of the intensity of labour. Marx's argument that it belongs to relative surplus-value is disputed by many Marxists. This paper argues that Marx's thesis is correct because the intensification of labour and the increase of its duration are ultimately two opposing trends and thus should not be coupled in the same concept.

This paper draws attention to the fact that in the Wealth of Nations Smith conceptualises labour as a malleable, adaptable resource, capable of undertaking whatever may be required of it as the economy evolves over time. This conception, equivalent to Marx's 'abstract labour', differs fundamentally from the neoclassical view of the labour force as comprised of individual agents, each with a given endowment of capabilities. In Smith's analysis, the flexible character of abstract labour is essential to allow the progressive extension of division of labour in the course of economic development. It is also an essential underpinning of Smith's explanation of how 'natural balance' is maintained within the economy; this implies an understanding of equilibrium values quite different from that of the later neoclassical conception. Abstract labour is furthermore a necessary element of Smith's claim that individual agents, pursuing their own ends, promote the general interest of society, understood not in terms of the attainment of an 'optimal', utility-maximising allocation of given resources, but in terms of the promotion of capital accumulation and economic development.

This paper presents an alternative reading of Marx's theory of value, which overcomes the dichotomy between production and circulation that characterizes several other approaches. This reading recognises that the subject of Capital is the capitalist economy, and it considers the relationship between labour and value from the viewpoint of the normalisation, synchronisation and homogenisation of labour. The formal possibility of existence of valueless money is discussed.

An important economic instrument in the management of a river catchment's water resources is the charges made by government for the abstraction of water from ground and surface sources. Abstraction charges are a form of rent. However, the classical theory of differential rent has limited application to abstraction prices because that theory's assumption of competition in the supply of the natural resource does not hold in this case. Here, the property rights of individual households and of institutions to draw water are assigned by a state monopoly. In order to understand the specific and contingent practices of government in different countries, a taxonomy of charge-setting principles is proposed. This paper sets out six principal fields of action for sustainable water resource planning and, in that context, recommends full incentive charging as the basis of catchment policy.

This paper connects two relatively recent streams of research in social science: the capabilities approach and the literature on social capital. The aim is to show that these are strictly connected in a dynamic process linking functionings and capabilities through social capital. The ability to attain new capabilities is enhanced by the possession of social capital; hence investing in its accumulation allows individuals to improve their welfare. Furthermore, new capabilities allow the individual to create new connections and access new networks, accruing his or her stock of social capital and opening the door to the possibility of attaining new capabilities. The paper hypothesizes that a dynamic spiral interweaves social capital, capabilities and functionings.

National social statistics have become one of the pervasive institutions of modern economics and politics. However, less is known about the origins of national accounting and the disagreements over its fundamental purpose and design. Modern national accounts emerged in attempts by German statistical entrepreneurs to understand the industrial economy and harness production in the service of national goals. In the American context national accounts emerged as a means for measuring social welfare, but evolved in the direction of the German and then British efforts at maximizing war production during the Second World War. The origins and evolution of social accounting in the German, British and American contexts illustrate the competing public goals served by our institutional choices. Different normative purposes, driven by new national goals, may require institutional change.

This paper addresses the effects on employment and the price level of a range of factors including capital accumulation, technical progress and money wage changes by formalising the aggregate supply and demand framework posited by Keynes in his General Theory. We find that labour-augmenting technical progress reduces the equilibrium level of employment, thus lending support to Hansen's notion of technological unemployment. We also find that capital accumulation and capital-augmenting technical progress raise the level of employment whereas, as argued by Keynes and several subsequent authors, money wage cuts have an ambiguous effect on the level of employment. We discuss a number of results as well as some aspects related to the adjustment of aggregate demand to aggregate supply in the long run. We conclude that Keynes's aggregate supply and demand framework provides a robust explanation of the mechanism through which increases in potential output lead over time to equiproportional increases in the level of aggregate demand and that the mechanism of adjustment to increases in the labour force in Keynes's theory differs markedly from that in classical theory.

Minsky's theory of financial instability is a strong alternative to neoclassical theory. Many Post-Keynesian authors use this analysis in order to elaborate models that give rise to crises or business cycles. Nevertheless, none of them has directly linked growth and financial structure. This article proposes a simple macroeconomic model linking the accumulation of capital and the state of the financial structure as defined by Minsky. The analysis shows how a capitalist economy may become financially fragile, and it suggests that instability is apt to be the rule.

In addition to her well-known contributions to the theory of capital, Joan Robinson provided, in her Accumulation of Capital and Essays in the Theory of Economic Growth, a theory about the determinants of the rate of growth. The growth rate was limited by entrepreneurs' animal spirits. Within that constraint, growth might be further limited by the inflation barrier, which could occur either because of a floor to real wages or because of full employment. This paper provides a series of simple dynamic models that illustrate these situations, drawing attention to this neglected aspect of her work and making it easier to compare her work with the monetary growth models produced by her neoclassical contemporaries.

According to the principle of effective demand, the equilibrium level of aggregate output is a multiple of the expected autonomous demand for the period under consideration. Aggregate demand matches aggregate supply in equilibrium, but the equilibrium may and usually does lie below the output corresponding to full capacity and full employment. However, in the long term firms are presumed to use capacity at the normal or desired degree. Can the principle of effective demand be extrapolated to conclude that the rate of growth of output will depend on the expected rate of growth of autonomous demand? A positive answer would be a significant step towards a Keynesian long-period theory of output. This paper attempts to make an advance in that direction. Starting from a 'prospective accelerator' that incorporates expected increases in autonomous demand and takes account of an excess of capacity in order to eliminate it, this paper shows that the path of autonomous demand determines both the actual and the warranted rates of growth.

This paper extends Blanchflower & Oswald's (1994) work on the wage curve to the 50 largest metropolitan areas in the United States. The wage curve is more elastic in US metropolitan areas than prior research shows for the nation as a whole, and the wage curve varies over the business cycle, becoming more elastic in periods of higher unemployment. The most striking finding is that black workers have a more elastic wage curve than do white workers. Estimating the wage curve with the non-employment rate, a measure of underemployment, shows elasticities that are substantially higher than for wage curves estimated with the unemployment rate. This trend further increases the negative effects on pay for blacks, who are more likely than white workers to be underemployed.

Economists who speak of uncertainty tend to attribute it to the objective, external, world, which they sometimes describe as being uncertain. However plausible this way of speaking about uncertainty, it also causes problems. This essay explore some of these problems, which have to do with what it means to attribute uncertainty to the state of the world, particularly to bring in the flow of 'historical' time. The essay advances the idea that uncertainty be understood not as an intrinsic attribute of the flow of time, but in connection with a specific moment in human history and the situation in which individuals find themselves at that moment. The essay focuses attention on the status of the subject of agent in economics, and the conditions under which knowing and acting are possible. Special emphasis is placed on the implications for knowing and acting on the distinction between traditional and modern society.

Three main theoretical positions towards state intervention and regulation are discussed in relation to the case of Swedish infrastructure. The positive, the normative, and the political transaction cost approaches are examined in relation to the historic development of regulatory systems in civil aviation, railroads, and telecommunications. The authors show that governance regimes have historical roots, and develop differently due to policies implemented by state agencies. Three points are illuminated with a view to the interaction between state and private actors in the transport and communication sector. First, the role and function of the state agencies as well as the political system itself point to the need for a more refined analysis of state action. The active role of state agencies is also discussed emphasizing the difference between political decisions and the implementation of such decisions. Second, the role of a historical perspective is discussed, arguing that it makes possible a better understanding of the reasons behind choices of particular strategies. Finally, there might be good reason to expect the state either to act solely as a rent seeker, or as a promoter of optimal solutions.

Typically real-business-cycle models are assessed by their ability to mimic the covariances and variances of actual business cycle data. Recently, however, advocates of RBC models have used them to fit the historical path of real GDP using the Solow residual as a driving process. We demonstrate that the success of RBC models at matching historical GDP data does not confirm the validity of RBC models. Through simulations we demonstrate that the Solow residual does not carry useful information about technology shocks and that the RBC model does not add incremental information about GDP. RBC models fit historical GDP data entirely because the Solow Residual is itself just a noisy measure of GDP.

Real business cycle models purport to explain the business cycle as the result of technological change. This paper shows that the commonly used measure of technological change, the Solow residual, does not capture changes in the technology of the production function. The model used in this paper is within the framework of models described in Hansen & Sargent (1990, 1991). Technological change is modeled as a change in the value of one of the 'deep' technology parameters in the production function. The Solow residual is incapable of capturing the effects of this sort of technological change. There is no consistent relationship between the direction and size of a technological change and the sign and size of the Solow residual. The Solow residual often moves in the wrong direction, e.g. a negative technological shock causes a positive residual. Even when the Solow residual has the right sign, its size is not consistent with the size of the technological shock, e.g. a larger positive change in technology does not necessarily cause a larger positive Solow residual.

Murray Rothbard's posthumous Economic Thought Before Adam Smith is notable for its vilification of 'the quiet Scottish professor.' While there is little disagreement that Smith was, at best, an ambivalent champion of free markets, Rothbard's indictment of him as a proto-Marxist is less than persuasive. We argue that Rothbard's book suffers from logical flaws, selective and incomplete textual evidence, a misunderstanding of Das Adam Smith Problem and the relevant literature, and an unawareness of modern incentive-based theories of the firm and state anticipated in Book V of The Wealth of Nations.

Adam Smith is one of the great founding figures of modern social science, in a larger sense than that conveyed by the popular perception of him as merely the founder of economics or political economy. He was aiming for a quite comprehensive social science, and while this grand project wasn't completed, substantial elements of it were. This paper is a reflection on Smith's conception of the sciences pertaining to human society and its relation to the modern demarcation of the social sciences. It affirms the integrity of political economy as a separable but not thereby 'autonomous' science, in Smith's understanding.

This essay examines the notion of a 'Scottish Tradition' and the role of common sense in Adam Smith's thought. It is a contribution to the contemporary literature on the 'Scottish Approach' and on the historical investigation of Adam Smith's intellectual background. It argues that a notion of common sense was behind Smith's view of science and that it may provide an epistemological foundation for the Scottish Tradition. The essay attempts to show how the notion of common sense may be seen as a way of emphasising the role of reason and judgement in the conceptualisation of phenomena with pragmatic and aesthetic content.

Sen's capability approach (SCA) has supported valuable work on Human Development (HD). It has brought attention to a much wider range of information on people's freedoms and well-being than in most earlier economic planning; but it also has troubling features and requires modification and enrichment. This paper first identifies the approach's components, the contributions of the HD Reports, and the doubts about whether SCA has a sufficient conception of human personhood to sustain work on HD beyond finding indices superior to GDP. It then examines SCA's central concepts. The concepts of capability and functioning lead us to consider both possibilities and outcomes, but their definition and use has been confusing. Besides Sen's opportunity concept of 'capability' we must distinguish skills and potentials; and distinguish levels and types of 'functioning'. To understand both consumerism and what can motivate and drive more humanly fulfilling development, we must elaborate different aspects and sources of 'well-being' and the content and requirements of 'agency', more than in Sen's chosen strategy. SCA's priority category of opportunity-capability must be read as a measure of personal advantage relevant in many public policy situations, rather than as a theory of well-being; and its concept of freedom must be partnered by concepts of reason and need.

This paper deals with the analysis of growth and development Nicholas Kaldor formulated in the later part of his career, during the 1970s and 1980s. Kaldor's passage from a resource-constrained to a demand-driven conception of growth was closely connected to his persistent effort to make economic theory more realistic and relevant, and led him to a complex vision of the growth process, with historical and institutional factors playing a fundamental role. However, the particular formulation in which Kaldor expressed his ideas about the strategic role of exports in the growth process, namely the long-period foreign trade multiplier, cannot fully capture the main characterisitcs of his vision of the growth process, and is in some respects contradictory with that vision. A critical role is played by Kaldor's conception of the determinants of investment, which, as in his full-employment growth models, he treats as entirely induced by output growth, and hence as not posing limits, in normal conditions, on output expansion.

We revisit the old but still vibrant Post-Keynesian debate over "fully-adjusted positions", defined by the long-run equality of actual and standard utilisation rates. The central proposition of this paper is that in a world where different groups inside and outside firms have different objectives, the equality of actual and standard utilisation should not be treated as the (only possible) long-run equilibrium condition. The argument is illustrated in a model of target return pricing with conflict inflation, building on Lavoie (2002, 2003). A "common language" for the conflicting claims by shareholders, managers, workers and banks is developed in terms of target profit rates, and it is shown that these contradictory claims can be partly reconciled through variations in the utilisation rate. The analysis unifies history and equilibrium in the sense that the nature of and the adjustment to the final equilibrium position depends on the objectives of the dominant social groups. We distinguish a "Fordist regime" and a "financialisation regime" and produce simulation results within a simple stock-flow consistent model that are broadly consistent with the stylised facts of these distinct historical phases of capitalism.

While both errors of overoptimism and errors of overpessimism are possible in the face of imperfect information, the presence of option value from deferring a decision to exchange causes trader errors to be overpessimistically biased. This is problematic because, unlike errors of overoptimism, errors of overpessimism are not 'automatically' revealed to the agents who make them. Furthermore, owing to the 'bad news principle of irreversible investment,' these errors are likely to persist. We show how entrepreneurial activity corrects such errors and prevents their persistence, creating a tendency towards market efficiency despite the presence of imperfect information.

Keynes's principle of effective demand constitutes a pillar for Post Keynesian theories. But Keynes's presentation remains difficult to interpret, mainly because the aggregate demand function is based on entrepreneurs' expectations. The problem is, then, to demonstrate how these entrepreneurs (whose only concern is making profits) are led to generate the effective demand (which partially results from the consumers' and investors' behaviour). Previous studies by authors such as Weintraub and Davidson highlight the trial-and-error procedure here involved. But since their analyses are not built on a precise accounting of monetary flows, they fail to demonstrate formally the coherence of the whole adjustment process. The aim of this article is to provide such a formal demonstration. We thus concentrate on verifying how the General Theory constitutes a coherent framework to analyse temporary equilibriums (at the end of every elementary period) and short-term dynamics (towards the stationary equilibrium) which bring entrepreneurs towards the stationary equilibrium. Our analysis rests on a distinction between the aggregate demand and the global expenditure functions. We also distinguish between two modes of price setting—ex ante price setting by entrepreneurs, and ex post price setting by the market.

The aim of this note is to examine briefly the influence Kalecki exerted on the author's way of thinking as a political economist. It is therefore a highly subjective piece, written with the benefit of hindsight. The great debt the author feels he owes Kalecki derives from Kalecki's uncompromising rejection of any kind of dogmatism. This trait appears both in Kalecki's seminal analysis of the macroeconomics of capitalism and in his attempt to work out a theory of growth of a socialist economy. In both cases one of the most inspiring features of Kaleckian economics was its constant awareness of the need to combine rationality with a full appreciation of its socio-political consequences. The author's 'grievances' focus on Kalecki's insufficient attention to microeconomics, and hence to the role of market mechanisms and the supply side of the economy.

In this paper, formal models of Ricardo's comparative advantage parable, which include general forms of consumer price response behavior, are constructed from a detailed textual exegesis of Ricardo's story. Using these models, the comparative advantage parable is shown to be mathematically over-determined and therefore generally unsolvable. To reinforce this conclusion, a numerical solution is derived for a constant elasticity version of the model. A necessary condition for the existence of a solution to the constant elasticity model is that two price elasticities of demand must be functions of the other two price elasticities of demand. General formulas are derived expressing this dependency. When realistic elasticities for wine are set, the model can only be solved if Portuguese demand for English cloth is unrealistically elastic. This demonstrates that sustainable and mutually beneficial trade between England and Portugal can only be realized through managed trade.