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Structuralist Economics: Worldly Philosophers, Models, and Methodology

Author(s): Ravi Baghirathan, Codrina Rada and Lance Taylor


Source: Social Research, Vol. 71, No. 2, "The Worldly Philosophers" at Fifty (SUMMER 2004),
pp. 305-326
Published by: The New School
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Ravi Baghirathan,Codrina
Rada, and Lance Taylor
StructuralistEconomics:
WorldlyPhilosophers,
Models, and Methodology

ECONOMICS IS NOT TO BE A SCIENCE OF SOCIETY ... ITS PURPOSE IS TO

help us betterunderstand thecapitalistsettingin whichwe willmost


likelyhaveto shape our collectivedestinyforthe foreseeablefuture"
(Heilbroner,1999: 310). These wordsare partof RobertHeilbroner's
manifesto inthelastchapterofhisclassicbook,TheWorldly Philosophers.
Theyreflectaspirationsunderlyingthe theories overnearly
puttogether
200 yearsby the greateconomicthinkershe reviews:Adam Smith,
David Ricardo,ThomasMalthus,JohnStuartMill,KarlMarx,Alfred
Marshall,Thorstein Veblen,JohnMaynardKeynes, JosephSchumpeter.
Theirlegacyis a questfor"sociallyas well as economicallysuccessful
capitalisms."
Beyondtheirfaithin the usefulnessofeconomics,Heilbroner's
worldlyphilosophershad somethingelse in common.Theyconcen-
tratedon structurein the sense of analyzingeconomicissues within
a framework of institutionsand agentsinteracting witheach other
throughmechanismsthatthemselvescompleteand makethe society
a sustainablesystem.Smith,forexample,is concernedwith"how is

byWillMilbergand supportfromtheProgram
•Suggestions on Markets, and Democracy,
Equality,
and theFordFoundationare gratefully
NewSchoolUniversity, acknowledged.

social research Vo! 71 : No 2 : Summer 2004 305

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it possiblefora community in whicheveryoneis busilyfollowinghis
self-interestnot to flyapartfromsheercentrifugal force?What is it
thatguideseach individual'sprivatebusinessso thatit conformsto
the needs of the group?"(Heilbroner,1999: 54) How does a coher-
ent economicsystememergefromdecisionsofindividualsoperating
withina framework constrainingtheiractionsbyevolvinginstitutions
and rules?The otherphilosophers askedsimilarquestionsfromdiffer-
entperspectives. Atheart,theywerestructuralists.
In thisessay,we arguethatwhattodayis called "structuralist
economics"substantially overlapswiththe thoughtof Heilbroner's
exemplary scholars.Next comes a synopticlookat contemporary struc-
turalistideas:thesignificance ofeconomy-wide output-costdecomposi-
tions,income-expenditure balances,and flowsoffundsrestrictions for
thedetermination ofmacroeconomic equilibrium;thetheoryofinfla-
tion; sectoralinfluenceson overalleconomicperformance; the role
of supplyconstraints such as scarcefood;distributive conflictand its
effectson inflationandgrowth;and cyclesand finance.We thenreview
the similaritiesand differencesbetweenstructuralist and mainstream
economictheoriesin twokeydimensions:outputdetermination and
inflation.Observations aboutmethodology lead into summingup of
a
themaincharacteristics ofthestructuralist approachto economics.

1. HISTORICAL PERSPECTIVE
Manyeconomistschosetheirprofession becausetheywantedto think
throughwaysto helppeople livebetter.The disciplineis groundedon
thispracticaldesire,a worldlymatter. Economicsshouldthereby be situ-
atedin thesocialcontextofthe systemit examines.Contextis a main
ingredientin structuralisteconomics,and also is centralto theworkof
Heilbroner'sgreat thinkers.
Likewise,structuralism emphasizessystem-wide analysis,aimed
at generatingproposalsforimproving economicperformance - thatis,
"policy"broadlyconstrued. In an examplediscussedlaterin thispaper,
one has to be aware of the levels and directionof the financialand

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realeconomicflowsbetweensectorsoftheeconomyin orderto decide
upon the main factorthatdrivesits growth.Keynes- a quintessen-
- believedthateffective
tial structuralist demandis the drivingforce
and therebyarguedthatmoney-wage reductionswouldnot stimulate
outputexpansion.Thisdiagnosisemergedfromdirectobservationof
the mechanismsgoverningcontemporary capitalism,withthe Great
Depressionbeing definedby the sudden collapseofaggregatedemand.
Furtherexamplesare providedin the nextsectioncoveringspecific
modelsand theirempiricalroots.
structuralist
A system-wide approachis also notablein theworkofthe clas-
sical economistshighlightedby Heilbroner(forexample,Ricardo's
emphasison distributive conflictbetweenlandownersand peasants,
and workers,affecting
industrialists the entireeconomyand society).
Marxof coursepickedup thistheme,expandingon the sociological
and politicalimplicationsof class conflictto constructhis own over-
archingtheories.
Veblenaddeda theoryofinstitutions and theirdynamicsand the
idea thattechnologycan createmarkeddifferences betweenecono-
mies.A subsequentexampleis thecenter-periphery divisionoftheworld
economyemphasized50 yearslaterbythe EconomicCommissionfor
LatinAmerica(ECLA)in Santiago,Chile,the seedbedofcontemporary
structuralism.
Technology and technologicalchangewiththeirfamousconse-
quenceofcreativedestruction
werealso centraltothetheoryofeconomic
development putforward byJosephSchumpeter, the lastofthe great
economicthinkers we learnaboutin TheWorldly LikeMarx,
Philosophers.
-
Schumpeterprophesiedthatcapitalismwill collapse notbecause of
theconflictbetweenproletariat and capitalists butratherbecausetech-
nologicaladvancewouldslowdue to an "institutionalization ofinnova-
tiveprocess."
Marx,Veblen,and Schumpeter all implythatstructure mayhave
to changeifthereare to be long-term shiftsin economicwell-being. As
discussedlater,appliedstructuralistmodelseitherinvestigate existing

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socioeconomic circumstances thatmight
to seekhistoricalregularities
be modifiedforthebetter(usuallygrowthand/or distributive
outcomes)
orconsiderhowconditions may need majoradjustment ifthereis tobe
anyhopefora moresatisfactory economiclife.
Raul Prebischat ECLA,along withHans Singer,ArthurLewis,
and GunnarMyrdal,amongothers,tookthe lattercourse,attributing
slowgrowthin developingcountriesto fundamental differencesin the
oftheireconomiesand production
structure systemsfromthoseofthe
richcountries.Continuingproductivity
industrialized growthin the
centerand slowtransfer oftechnology fromdevelopedto developing
countrieswerethemainculprits.Notethe system-wide integrationof
developingeconomiesintoa completemodelofworldtrade,whichcan
be extendedto incorporatethefinancialsectoralongsiderealeconomy
dynamics.
This step points to a definingcharacteristicof methods of
inquiryspecificto structuralism - directobservationof stylizedfacts
thatpertainto theeconomicsystemor itsphenomenato be analyzed.
Thus,the observedasymmetries betweenthe structureofproduction
in
in developedand developingcountriesare essential understanding
the differencesin the levelofdevelopment ofthe two."[Overcoming
the basic asymmetries systemrequiresnot only
of the international
a changein the international economicstructure,but also an effort
to transform the structures of the peripheralcountriesthemselves"
(Ocampo,2001).

2. STRUCTURALIST MODELS
Structuralisteconomicmodels share characteristic features.A good
placeto beginis witha socialaccounting matrix (SAM)ofthesortused
bymanycontemporary tobuilda systemic
structuralists basisintotheir
models.
Table 1 is a schematicbased on a SAMemployedby Foleyand
Taylor(2004). It shows flowsof paymentsover a time period(typi-
callyone year).The authorsdistinguish sixgroupsofeconomicactors:

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TABLE 1: SCHEMATIC SOCIAL ACCUMULATION MATRIX

Changes
_ in Capital
Output
,Uses
, ofr ^ . _, -Totals
^ .
^ ^ ,Income Stocksand
Costs _. . .
Financial
Claims

Output Output Value of


Flows Demands Output

Transfers
Sources of Production among Income
Income Costs Income Totals
Recipients

Financial Savings Flows of "Zero"


Balances Flows Funds

„ , Value of Income
Totals _ ^ ^ T ^ . Zero
Output Totals

worker-households, capitalist-households, business firms,govern-


ment,a financialsector,and the restoftheworld.The basic account-
ingconvention in theSAMstipulatesthatsumsofcorresponding rows
and columnsshouldbe equal.Thefirstrowgivesa demanddecomposi-
tionin currentprices,withthecomponents(households'consumption
levels,government purchases,exports,investment) summingto the
value ofoutput.In the firstcolumn,the same totaldecomposesinto
costsofoutput - wages,profits, and imports, whichin turncontribute
to incomeflowstotaledat thefarright.
Based on a SAM'soverviewof existingdistributive and finan-
cial relationships,structuralistmodelsare set up to informsensible
economicpolicy.In whatfollowswe provideexampleswithreference
to thehistoricalcontextwithinwhichtheyweredeveloped.
demand
Effective Thetable1 SAMfitsnaturally withoutputdeter-
minationbyeffective demand- a typicalstructuralist perceptionabout
howtheeconomyfunctions. It is easyto runthrougha description.

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First,the"Outputcosts"columnis naturally as deter-
interpreted
the
mining price -
level priceper unit outputdecomposesin laborand
importcostsplusprofits.
Second,totalsavingsfromthe groupsof actorssums to gross
investment. Underreasonableassumptions,savingsand importleak-
ages dependon thevalueofoutput.Realdemand"injections" - invest-
ment,government spending,andexports - arepredetermined(orweak
functionsof output).The stageis set forKeynesiandetermination of
outputbyeffective demand:

The reconciliationof the identitybetween saving and


investment withtheapparent"free-will"oftheindividual
to savewhathe choosesirrespective ofwhathe or others
maybe investing, dependson savingbeing,like
essentially
spending,a two-sidedaffair.Foralthoughthe amountof
influ-
his own savingis unlikelyto have any significant
ence on his own income,the reactionsof his consump-
tionon the incomesofothersmakesit impossibleforall
individualssimultaneouslyto save anygivensums.Every
suchattemptto save morebyreducingconsumption will
incomesthattheattemptnecessarily
so affect defeatsitself
(Keynes,1936:84).

Outputthusadjuststo bringsavingsin line withinvestment,


or to make the sum of the firstcolumn entriesin the SAM (total
income)equal to the sum of the firstrow (totaloutput).The "para-
dox ofthrift"hintedat byKeynesalso applies- an attemptbyhouse-
holds to save more can backfireby reducingeffectivedemandand
incomesas well.
Third,supposethatcapitalisthouseholdsthemselvesdetermine
theirflowallocationsof savingstowardnew holdingsof bonds and
equity.Firmschooselevelsofnewborrowing and equityissues,consis-
tentwiththeirflowof fundsbalance. The changein foreignequity

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holdingsfollowsfromthe correspondingmarketbalance column.
New foreignbond acquisitionsfollowfromthe flowmarketbalance
forbonds,withthe otherrelationship clearingto assuresystem-wide
accountingconsistency. Variationsaroundthisscenarioare possible,
but sharea commontheme- financialflows(and therebystocks)are
"endogenous"in a stock-flow consistentaccountingframework so long
as theinterest oftheratefollows,in turn,from
rateis stable.1Stability
institutional assumptionsabout how financialbusinessesand their
regulators operate.As a consequence,policyrecommendations based
on thistypeofapproachmightverywell differ fromone economyto
theothergiventhatinstitutions and structures
ofthesystemare likely
to be different.Thus,structuralism attemptsto workwithwhatis out
thereratherthanwhatwe wouldlikeoureconomyto be.
Money wagecuts So farwe havejointlydeterminedoutput,the
pricelevel,and financialflows.Workingthroughthe SAMsystem,it
is easyto verifythatthelevelofeffective demanddependson thereal
wage and exchangerates(or the nominalratesdividedby the price
level).Ifwe ignoreimportsforthemoment,thenpriceis setbya mark-
up overwagecosts.A reductionin themoneywageratewillreducethe
pricelevelin proportion, leavingtherealwageandthelevelofdemand
unchanged.Thisis thegistofKeynes'sargument againsttheefficacyof
wage-cutting, setoutin chapter19 ofTheGeneral Theory.2
Contractionary devaluationNow let us bringimportsback in.
If the price level is set as a mark-upon wage plus importcosts,
then nominaldevaluationwill driveup pricesand reduce the real
wage, cuttingintoworkers'consumptiondemand.Also,by raising
thelocal costofimports(orthe size ofthe importleakage),devalua-
tionreducesreal nationalincomeunless it setsoffastrongincrease
in demand injectionsfrommore exports.Throughboth channels
(there are others),devaluation can be "contractionary," causing
outputto fall.But in line with structuralist methodology, is not
it
the onlypossibility.Underappropriatecircumstances,devaluation
can be expansionaryas well.

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TheoryofinflationThe SAMcost decompositionalso underlies
a familyof structuralistinflationtheories,lypically,theystartfrom
"conflictingclaims"or a battleoverincomesharesbetweengroupsof
economicagentssuchas workersand firmsor the homecountryand
therestoftheworld.A crucialpricesuchas thewageor exchangerate
becomesthe locus ofconflict.It maybe drivenup, leadingto higher
outputpricesvia a mark-up. Subsequently, a "propagationmechanism"
suchas indexationofwagecontracts to risingpricestransforms a local-
ized increaseinto an inflationary processinvolvingall pricesin the
system.On thisview,inflation is drivenfromthecostsideoftheecon-
omy(the first
column of the SAM)as opposedto beinga consequence
of excessdemandand/or"excessive"moneycreation(thiscontrastis
discussedin moredetaillaterin thepaper).
The Germanhyperinflation is a classiccase.3Allthe storiesstart
fromtheexternalimbalancesGermany facedafterWorldWarI. Under
a 1921 Londonagreement, thecountry was obligedto payreparations
amountingto 80 percentof exportrevenues.Block's(2002) analysis
emphasizestheincompatibility betweenthesocialgoalsoftheWeimar
Republicand thisexternalburden.Thiscontradiction set in motiona
distributivestruggle tax
withinflation dynamics. Currency devaluation
fedintoa wage-priceinflationprocessthateventuallyspiraledout of
control.
The chronologyof inflationstabilizationfollowsthe structur-
alist narrative.Even thoughGermanyhad a balanced budget,after
December1923thecurrency had to be supportedbytheReichsbank's
strictcreditcrunchpolicy(Kreditstop). Thesharplyupwardslopingterm
structure ofinterestratesalso contributed to thecontinuedfragility of
the currency. Onlyafterthe ratification in
ofthe Dawes plan August
1924andthe return ofsubstantial capitalinflowsdidthenewcurrency
stabilize.Theincomingmoneyrelaxedtheexternalburden,thuseasing
thedistributive struggleat thecoreofinflation.
The LatinAmericanvariantof structuralist inflationtheory
was formulated aroundECLAin the 1950s.The analysisemphasized

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the priceoffood.Higherpricesforessentialcommoditiesreducethe
realwageand heightendistributive tension,whichcan lead to a wage-
fashion,thistheoryis builtaround
pricespiral.In typicalstructuralist
observedlabor and commoditymarketresponsesand institutions,
withoutgeneralizing beyondthesituationat hand.
dynamicsThe separationof workerand capitalist
Distributive
householdsin table1 suggeststhattherecan be distributive effectson
demandas wellas priceandwageinflation. A lowerwageshare(orratio
oftherealwagetolaborproductivity), forexample,can cutintoworker
householdconsumption whileat thesametimestimulating profitsand
investment demand.Thelevelofoutputcan riseor fallin responseto a
higherwage share,witheffective demandbeing"wage-led"or "profit-
led" accordingly.Similarlythewage sharemayriseor fallin response
to a higherlevelofoutput,in "profit-squeeze" (orMarxist)and "forced
savings"(orKaldorian)cases,respectively, as wage and priceincreases
and productivity growthrespond changesin capacityutilization.4
to
These interactions can be builtinto modelsof cyclicalgrowth
adumbrated byMarxand perhapsfirstformalized byGoodwin(1967).
Cyclesaroundgrowthtrajectories ofthe realwage,productivity, and
outputare generatedfromlagged adjustmentsof these variables
to capacityutilizationand the wage share. Econometricresultsby
Barbosa-Filho and Taylor(2003) suggestthatthe US economycan be
characterized as havingprofit-leddemandand profit-squeeze distribu-
tivedynamics;thatis, demandis reducedbya higherwage sharebut
the shareitselfrisesin responseto greatercapacityutilization.The
resultingcyclesshowa pro-cyclical profitrate,consistentwiththedata.
Becauseit incorporates wage and pricedynamicsexplicitly, themodel
also generatesstructuralistinflation.
Inflationratesincreasepro-cycli-
callyas mightbe expected.
ECIApointed
Center-Periphery toa number ofdissimilarities
between
centralandperipheral economies, orthe"North" and "South"as theyare
alsooftencalled.TheNorth'soutputlevelcanbe takenas demand-driven,
withitspriceleveldetermined bycosts,as inthediscussion oftable1.

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The Southdiffers fromthe Northin significant ways.Southern
workers'savingsis low and theylargelyconsumethe Southerngood
(naturallyinterpreted as a semi-subsistence productsuch as "food").
- -
Southerncapitalists a "comprador"class mostlyconsumeimports.
Moreover, in an important signofSoutherndependency, capitalgoods
in
are notproduced theregion and must be imported from theNorth.
Anotheraspect of dependencyis that demand in the North
drivesthetwo-region system.In particular, the Northern tradedeficit
emergesfromthatregion'smacroequilibrium. The North'sdeficithas
to be the South'ssurplus.Witha determinate levelof Southerncapi-
talistsavings, Southern investment has to be endogenousor savings-
driven-theSouthcannotchooseitsownlevelofinvestment.
ECLAassumedthattheSouthexportsitscommodity intoa price-
clearingmarket.Supposethattheregion'slevelofoutputis fixedfrom
the supplyside in the shortrun.Adoptingthe labormarketspecifica-
tionfavoredbyRicardoand Marx,we also assumethattheSouth'sreal
wage is fixedbecausethereis an infinitely elasticsupplyoflabor.The
implication is thatmarketbalanceis attainedas thepriceoftheSouth's
outputadjuststo bringSouthernexports(or the North'simports)in
linewithavailablesupply.Southerncapitalists'incomeis thenonwage
"surplus"fromproduction; togetherwiththetradedeficit, theirsavings
determines theSouth'slevelofcapitalformation.
A finalkeyECLAassumptionis thattheNorth'sdemandforthe
Southerngood is inelasticwithregardto bothpriceand income.One
implication isthatgrowthintheNorthwillnotstimulate muchdemand
forSouthernexports,leadingin turnto a stagnantSouthernpricelevel
and slowcapitalformation. Moreover, sincethe Southis sellingintoa
price-inelasticmarket,an increasein itsownoutputdue to investment
and/orhigherproductivity couldlead to a sharpreductionin itsprice.
These resultsplus those alreadymentionedstronglysupportECLA's
basic policyrecommendation thatthe South should diversify away
fromspecializingin primary productexportstowardexportpromotion
and importsubstitution for manufactures.

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Sectoralinteractions The modeljust discussedis builtarounda
"fixed"(or mark-up)priceforthe Northand a flexiblepriceforthe
South.This "fixprice-flexprice" can be reinterpreted
specification in
manyways.5Forexample,withinone economythe "North"mightbe
treatedas an urban/industrial sectorand the "South"as rural/agricul-
tural.Thenlaggingagricultural supplycouldlead to risingfoodprices,
fallingreal urban wages, and the distributiveconflictunderlying the
ECLAinflation theorymentionedearlier.The priceincreaseswouldbe
exacerbatedinsofaras demandfortheagricultural productis inelastic.
Financial Cyclesand Crises An additionalfeatureof the SAMis
thatitallowsfornon-zerolevelsofnetworthofthedifferent groupsof
economicactors.Underappropriate assumptions, wealth levelscan be
treatedas endogenousvariables.Thispossibility has important impli-
cationsforrealisticmodelingofthe financialcrisesthatare endemic
to a capitalistsystem.Endogeneity ofnetworthopensroomforquan-
tityadjustments in the financialsystem,whichsimplycannothappen
in the usual storyinvolvingclearingof securitiesmarketsthrough
changesin ratesofreturn. Thisscenariois builtfirmlyintomainstream
macroeconomics throughthe Modiglianiand Miller(1958) theorem,
whichpostulatesthatbusinesssectornetworthis identicallyzero or
thatfinanceis a veil(a directanalogofdetermination ofoutputbyfull
employment, or Say'sLawas discussedbelow).
Based on the SAM,one can modelobservedfinancialcyclesby
combiningspeculativedemandformoneyin a Keynesianfashionwith
animalspiritscomingfromthe real sectorthatdependon variables
suchas interest and profitrates.Ifrisingprofitability
leadsto a decline
in speculativedemand,theratioofprofitrateto interestratecan rise,
furtherstimulatinginvestmentand output.This positivefeedback
mechanismcan underliecyclesas analyzedby Minsky(1975) in his
interpretation ofKeynes.
In a longertimeframe, enterprise equityvaluationsand outstand-
ing debt(as ratiosto capitalstock)appearto follow20-yearcyclesin
countries suchas theUnitedStatesand theUnitedKingdom, alongwith

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in businessnetworth(Taylorand Rada,2003).Extensions
fluctuations
ofthismodelcan incorporate real sectoractivityin a morecomplete
mannerwithan investment functiondrivenbyanimalspiritsà la Keynes,
orbytakingintoaccountexchangeratecyclesintheanalysisofeffects of
international flowson an openeconomy'smacrostability.
financial

3. CONTRASTS WITH THE MAINSTREAM


The examplesjust presentedsuggestthatstructuralism can addressa
wide rangeof economicissues. But so can modelscomingfromthe
mainstream. An importantquestionis whetherresultscomingfrom
andmainstream
structuralist modelsconvergeordiverge.Significantly,
divergenceappears to be the rule. We illustratein two important
dimensions - determination ofthe levelofoutput(ormacroeconomic
"closure")and therateofinflation.
The model sketchedin connectionwithtable 1 is Keynesian.
Througha multiplierprocess,output and employmentare deter-
minedbyinvestment and profitshare.The levelofeconomicactivity
willbe low,forlow demandinjectionsfrominvestment, government,
and exportsor highsavings,tax,and importleakages.The scenariois
simplistic,but it does illustratethebasic insightthatoutput,employ-
ment,and savingscan adjustto meetthe levelofeffective demandas
drivenbytheneteffect ofoffsettinginjectionsand leakages.As itturns
out,considerable macroeconomic afterKeyneshas been devoted
effort
to refutingthiscausal scheme.Fullemployment can thenbe guaran-
teedon thebasisofstandard mainstream economic theory.
One variantgoes as follows:outputis constructedfromavail-
able laborand capitalaccordingto an "aggregate production function"
withmathematically "nice"properties. The realwage and profitrates
to
are set according "marginalproductivity rules"of the sorttaught
in all microeconomics courses.Withsuchinputpricingrules,one can
construct neoclassicalmacromodelsinwhichwagesand profits adjust
so thattheamountsoflaborand capitalused equal their"fullemploy-
ment"levels.Ifthe level of eitherinputchanges,moreover,the real

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wage and/orprofitrateswill adjustso thatmarketsfortheseproduc-
tioninputscontinueto clear.Whenthathappens,the totalsupplyof
savingsis also determined bythe marginalproductivity formulasand
fullemployment. -
Say'sLaw fullemployment of availableresources
combinedwithsavings-determined -
investmentis enforced.6
As withthe Southas discussedearlier,thereis no roomin this
systemforan independentlydeterminedlevel of investment.The
principleofeffective demandand a fullemployment mainstream(or
"Walrasian,"in honorof the nineteenth-century Frenchneoclassical
economistLeonWalras)description oftheeconomyis incompatible. In
a Keynesianworld,thewayto stimulateoutputand economicgrowth
is to raiseinvestment; byreducingconsumption demand,an increase
in potentialsavingswould have the oppositeeffect.IfWalrasrules,
growthwillbe fasterifthereare increasesin the savingssupply(due
to,forexample,reductions in government spending).The twomodels
give dramatically different policy recommendations because of the
causalrelationships thattheyhavebuiltin.Thequestionofhowbestto
"close"macroaccountssuchas thosein table1 withan appropriate set
ofbehavioralhypotheses is one thatconstantly recurs.
Similarlyforinflation.As was discussed,structuralist theories
tendto buildup an inflationary process from production coststhrough
distributive tensionand propagation mechanisms. Monetarist theories
determinethepricelevelfromthe moneysupplydirectly. The money
supplyin turnis basedon loansfromthebankingsystemto firmsand
government. The government usuallygetsthe blame formostofthe
borrowing. Ifitsdebt growsexponentially, thenso do themoneysupply
and pricelevel,settingoffan inflationary process.Steadilygrowing
pricesmeanthatcostindicatorssuchas themoneywage and nominal
exchangeratehavetogrowsteadilyas well.In otherwords,monetarist
and structuralist theoriesinterpret tablel's outputcostdecomposition
in oppositedirections.
Monetarist theoryis simpleminded, oftendoes not fitthe data,
and ignoresall distributional issues. On the otherhand,you rarely

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observeongoinginflationwithoutgrowthof (some measureof) the
moneysupply.Structuralist theorycan be tailoredto fitan economy's
specificinstitutions and providespolicyinsightabout how inflation
can be tackledbycontainingrisingcosts.Each economy'sinflationis
suigenerisand contextspecific.Someblendofthetwoapproacheshas
to be designedto fitthesituationat hand.
In sum,thereare significant betweentheworldview
differences
and methodsadoptedbystructuralist and mainstream economics.The
gap betweenthe two approachesis even deeper in a philosophical
sense.In the nextsectionwe examinethe methodology ofstructural-
ismas comparedwiththatofthemainstream.

4. METHODS OF STRUCTURALIST ECONOMICS


In our view,Heilbroner'sdriveto writeTheWorldly came
Philosophers
froma philosophical issuethat is grounded in the day-to-dayrealityof
anyseriouseconomist'swork.It can be understoodfromHeilbroner's
question:"Is economics,then,an analysisofthatwhichwe wishto see
orcannothelpourselvesfromseeing,ratherthana detachedandobjec-
tivedissectionofa worldthatis unambiguously 'there?'"(1999: 309)
Structuralistsconcentrateon lookingjust "there."
Itwouldbe wrongto thinkofstructuralism as purelya response
to mainstreameconomics,but it can certainlybe consideredthe
antithesisto Friedman's(1953)PositiveEconomics.The dominantmode
of theorizingin mainstreameconomics deductive,which deals
is
purelywithobservableeconomiceventsand characterizes causalityin
termsofconstantconjunctions or correlation,and is henceempiricist.
Structuralism'smethodis notdeductiveandneitheris itpurelyfocused
on "observables."As describedbyPalma(1987),

Structuralismis basicallya methodofenquirywhichchal-


lengesthe assumptionsofempiricism and positivism
Theprincipalcharacteristic of is thatittakes
structuralism
as itsobjectofinvestigation thatis, the recip-
a "system,"

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rocal relationsamongpartsof a whole, ratherthan the
studyofthe different partsin isolation.In a morespecific
sensethisconceptis used bythosetheoriesthatholdthat
thereare a set ofsocial and economicstructures thatare
unobservablebut which generateobservablesocial and
economicphenomena(528-29).

Structuralismuses a modeofinference similarto thatofabduc-


tionor retroduction. It startswithobservedphenomenon,whatis out
and thenworksbackwardto a theory.
there, The focusis noton predic-
and
tionbutdescription explanation.
One exampleofthismethodological styleis the theoryofinfla-
tion.Whilemonetarist theoryassumesthatinflation is a purelymone-
taryphenomenonand thusmoneysupplyis the main culpritthata
centralbankneedsto controlin orderto controlinflation, structuralist
economicsfocuseson theinstitutional structure oftheeconomyand of
thedistributiveconflicts thatare inherentto itand thatdetermine the
observedinflationary spirals.The structuralistinflationtheoryis not
rootedin some abstractmodelbased on unrealisticassumptions, but
has beenderivedinsteadfromobservations ofinflationary phenomena
suchas theonethatravagedtheGermaneconomyinthe1920sorLatin
Americaneconomiesin the1950sand 1980s.
Unlikemanyschoolsofeconomics,structuralism uses different
waysto make an initialobservation.Thereare numerousexamples
drawingupon Kaldor's(1961)stylized factsas a startingpointand in a
morecontemporary approachwe have seen how SAMscan be used to
decomposedataintoaccountingidentities.7
Ultimately,the difference in methodsused bydifferent schools
ofthoughtcomesfromthedifference in thevisionsthateach one holds.
Diversevisionsunderliethe analytical methods deployedin support
of differenttheories.This insightwas recognizedby Heilbronerin
Schumpeter's writing on thesourceofanalytic work as beingthe"picture
ofthingsas we see them,andwheneverthereis anypossiblemotivefor

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wishingto see themin a givenratherthananotherlight,the wayin
whichwe see thingscan hardlybe distinguished fromthewayinwhich
we wish to see them"(Heilbroner,1999: 308). An immediateconse-
quenceofthisinsightrelatesto theissueofgeneralization.
Structuralismhas neversupporteda generaltheory, or a univer-
sal theory,thatwould proposea one-size-fits-all policyprescription.8
One exampleis the ECLANorth-South model,withits separationof
the worldeconomyintotwo poles: "center"and "periphery." Policy
prescription was thenbasedon theidea ofthetransformation ofproduc-
a
tionin a peripheraleconomyintoone alongthelinesof center-style
economy.Theoryand policyprescriptions referto an economyat a
specifictimeand place in itshistoricaldevelopment.
In termsof model closure, Setterfield(2004) discusses two
specificforms:artificialand temporal.Structuralistclosure will
dependon relevantfactors, thejudgmenton structure, and willthere-
forebe countryspecificand timedependent.It is naturalto thinkof
thissortofclosureas beingdefinedbythe secondofSetterfield's two
criteria:temporal(orspatiotemporal in an immediateextension).The
underlying SAMleavesopenthequestionwhetherto closetherealside
ofthe economyby Say's Law fromthe supplyside,or througheffec-
tive demand.The closureto be selecteddepends on the observer's
overallperceptionof the patternof causalityin the economybeing
studiedat a specifictimeand place.
Muchlike Keynes,structuralists have a greatdeal ofskepticism
toward standard econometrics. Under classical logic the "meaning"
termis fixedforthe periodunderfocus.Ifwe are to
of a (scientific)
deal withthisvariablethenits meaningmustbe the same through-
out thetheoretical systemand acrosstimeand space.Butwe knowin
economicsthathowvariablesarecalculated,andtherefore theirmean-
ing,changesfromcountry to country and acrosstime.Chickand Dow
(2001)referto an example,particularly pertinent to structuralism, to
showhowconstantmeaningalso findsproblems system in a character-
ized bythe evolutionary changeofinstitutions: moneywas once full-

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bodiedcoinandis nowa networkofdebt;thequantity theoryofmoney
dealswiththevariablemoneywitha constantmeaning;oncewe note
thatthemeaning ofmoneyhas changedthenitis easyto see howexoge-
neityis onlyapplicableto theformer.
A secondstrandofcriticism aimsat Friedman'spositivemethod
as builtintoreduced-form rankstheverisimil-
equations.Structuralism
itudeofa theoretical over
description parsimonious itis
predictability:
the latterthatis thegoal ofreduced-forms equations.Underlyingthe
focuson predictive poweris Hume'sanalysisofcausationor moderni-
ty'ssuggestion As causationcannot
thatsciencefocuseson regularity.
be empiricallyderivedthenthe focusmustbe on prediction based on
for
pastexperience.However,unsurprisingly structuralism, causality
is a real phenomenonthatneeds to be uncoveredand analyzed:it is
nothardto thinkofcausalityas a relevantfactor.As thetheoriesthat
are appliedare bothcountryspecificand timedependent,it follows
thattheuncoveredcausal chainswillnotbe generalizable.Once iden-
tified,theproposedcausal chainwillrelateto howthe specificmodel
is closed.Withclosurebeingtemporaland specificto the model,it
cannot be expanded to an all-encompassingtheoryof economic
phenomena.
emphasize the use of simulationover
Finally,structuralists
econometrics,usingSAMsas a basis forstock-flow
consistentmodels
"withno blackholes"in theaccounts.9

5. CONCLUSIONS
uTheEnd oftheWorldlyPhilosophy?" the aria finaleof Heilbroner's
masterpiece, is morethana mereconclusion.Firstand foremost itis a
deliveryofresponsibilityto futuredisciplesofeconomics"byremind-
ing ourselvesof what economicsis ultimatelyabout." "Atits core
economicsis an explanationsystemwhose purposeis to enlighten
us as to the workings,and therefore to the problemsand prospects,
ofthatcomplexsocialentitywe call theeconomy"(Heilbroner, 1999:
311). Second,the closingchapterof Heilbroner'sWorldly Philosophers

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acknowledgesthat economicsis the childof capitalism,and could
notexistwithoutit.The greatproblemis thatmostofcontemporary
economicshas departedfromits initialpurpose- thatof analyzing
the capitalistsystemin its entirety.
Heilbronerurgeseconomiststo
reversethispathand let economicsbe whatit was intendedto be by
itsforefathers:

[E]conomicvisioncould become the sourceof an aware-


nessofwaysbywhicha capitaliststructure can broadenits
motivations,increaseitsflexibility,and developits social
In a
responsibility. word, in thistimeofforeseeablestress,
thepurposeful end oftheworldlyphilosophy shouldbe to
developa newawarenessoftheneedfor,and thepossibili-
tiesof,sociallyas well as economicallysuccessfulcapital-
ism(Heilbroner, 1999:320-321).

We accept this charge and argue in this paper that froma


Heilbronerian perspective,structuralisteconomicsis robust.
Fromthe historicalpointofview,Heilbroner' s economicthink-
ersheldvaluessimilarto thoseofstructuralists today.Investigation of
theeconomicsystemis integrated intothelargersettingofthesociety,
withthefinalgoaltheimprovement ofthewell-being ofhumankind.
A SAM,the representative tool of late structuralism, lets us
centralizeinformation thatcan be used to discernthe main features
oftheeconomyin question.Is effective demandwage-orprofit-led? Do
conflicts
distributive as observedfromproduction costdecompositions
pointto one or anothertypeof inflation? Will financialmarketfluc-
tuationslead to a crisis?The valuableknowledgethe economistgets
fromdoingthiskindofworkcan greatlyassistpolicymakers in design-
ingpackagesthatfitthe economywe reallyconfront insteadofsome
imaginary economythatwe wouldliketo haveorthatwe shouldhave.
economicstriesto respondto Heilbroner's
Structuralist appealto pose
questionsthatgo deeperthanmereintellectual exercises aboutmarket
behaviorand economicagents'matchesand mismatches.

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Finally,the methodological framework of structuralist econom-
ics remainsa tool and not an end chosenforthe sake of generating
pleasingformalsolutionstotheoretically
estheticdlly complexproblems.
Structuralist
methodology is often as
criticized being ad hoc.We accept
thatcriticismby replyingthatindeed,our methodologyis in many
instancestailoredto servebestthefinalpurposeofeconomicanalysis,
whichis theunderstanding ofeconomicprocessesthataretheengines
ofchangeofthecapitalistsystem.
ThevisionHeilbroner is talkingabouthintsat ideologicalneutral-
ity,inthatwhenitcomestoaffecting themechanisms ofcapitalismone
has to understand thattheimplications are not about shapingpolitical
beliefs;they are about shapingpeople'sdaily lives.The visionis moral
in thatit dreamsof "sucha new economics[which]will incorporate
knowledgefromthedomainsofotherbranchesofsocialinquiry, butif
theusefulnessoftheworldlyphilosophyofthetwenty-first centuryis
to match that of thenineteenth and earlytwentieth, it will need to be
bothdeepenedand enlarged,aboveall comparedtothedesiccatedresi-
duewithwhichwe are lefttoday"(Heilbroner, 1999:321).Structuralist
economicsattempts to takeon Heilbroner's task.

NOTES
1. Thistreatment offinanceis ofcoursepost-Keynesian. Keyneshimself
postulateddemand-supply balancefor"money," withthebondinter-
estratevaryingtoclearthemarket. TheSAMformat is easilyextended
todealwiththiscase as well 2004).
(Taylor,
2. Keynes's argumentwas in fact slightlydifferentbecause he
assumedwhatwould nowadaysbe called a neoclassicalaggregate
cost functioninsteadof mark-uppricing,but the essentialswere
the same.
3. ThankstoThorsten BlockfordiscussionoftheGermanexperience.
4. Such distributivedynamicsgo back to Ricardo,who envisageda
conflictcomingout oftherelationships thatexistamongthethree
mainownersoffactorsofproduction:capitalists,landowners,and
workers.Hisgloomypresentiments didnotcomebywayofaxioms;

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rather,he notedthatin a capitalistsystemone groupmightgain
at theexpenseofanothergroup.In his theorythecapitalists"were
elbowedaside" by a double "squeeze" throughhigherwages and
rents.
5. Terminology based on Hicks(1974).The basic modelhas been rein-
ventedmanytimesbymanypeople.
6. The law is creditedto the early-nineteenth-century
Frenchecono-
mistJeanBaptisteSay."If,however,. . . [Say'sLaw]is notthe true
law relatingthe aggregatedemandand supplyfunctions, thereis a
vitallyimportant chapterofeconomictheorywhichremainsto be
written and withoutwhichall discussionsofaggregateemployment
arefutile"(Keynes,1936:26).
7. Stylizedfactsarethumbnail summaries ofan economy'ssalientchar-
acteristics.
Forexample,Kaldorthoughtindustrialized economies
couldbe describedin termsofa stablecapital/output
ratioand profit
ratealongwithsteadyincreasesin laborproductivityandthecapital/
laborratioovertime.
8. AsJoanRobinson(1962)observes, "TheGeneral wasrootedinthe
Theory
situationofGreatBritaininthe1930s;Keyneswasrashinapplying its
conclusions equallyto medievalEnglandand ancientEgypt."
9. Godley(2004)givesa recentoverview.

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