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Edward J. Nell
Edward J. Nell (b. July 16, 1935) is an American economist and a professor at the New School for Social Research (NY). Nell has been a member of the New School faculty since 1969, and has held the rank of Malcolm B. Smith Professor of Economics since 1990. Nell is best known for his work in macroeconomic theory, monetary analysis and economic methodology and philosophy. He has written some twenty books. His articles on economic theory and methodology have appeared in leading journals like the American Economic Review, the Journal of Political Economy, the History of Political Economy, the Journal of Economic Literature and Philosophy of Science, Cambridge Journal of Economics, Eastern Economic Journal, etc. Nell is also known for his critical view of the methodological and philosophical foundations of Neo-Classical Economics (what Nell calls free-market economists), examined in his best known book Rational Economic Man (Cambridge University Press, 1975) and coauthored with English rationalist philosopher Martin Hollis. Nell is the originator of the General Theory of ‘Transformational Growth’. The full development of the General Theory of Transformational Growth came in the 90s, and was published as The General Theory of Transformational Growth (Cambridge University Press, 1998). The methodology/philosophy which underlies the Theory of Transformational Growth is a form of realism, based on filling in ‘conceptual truths’ by doing fieldwork and then building models of solidly based institutionally grounded relationships.
Biography
Nell was born in Riverside, Illinois, a suburb of Chicago, on July 16, 1935, only son of Marcella and Edward Nell. His father was a journalist and taught journalism at Northwestern University; he ran the Quill and Scroll foundation for high school journalism. His mother was a public school administrator and then a professor of education at Roosevelt University.
Nell attended Princeton University (1954-1957) and received his B.A Magna cum Laude in 1957 (in the Woodrow Wilson School). His field of study at Princeton varied a good deal. He studied mathematics, physics and philosophy, before discovering a passion for economics and politics. He was awarded a Rhodes scholarship in 1957 which took him to Oxford University. Though he had already completed a B.A from Princeton, Oxford enrolled him for another, as was the custom at the time. He obtained a First in PPE in 1959 at Magdalen College, studying with Frank Burchardt and David Worswick. Nell then stayed at Nuffield College (1959-1962), Oxford University, to do his advanced work on the foundations of economic analysis, complete his doctoral thesis and further develop his research.
He returned to the US to teach at Wesleyan University, but later went back to the UK to lecture at the University of East Anglia, also doing research at Cambridge University. On various leaves of absence from the New School for Social Research he taught at Bennington College, and at Bard College, at McGill University, the University of Siena in Italy, and the University of Bremen, and Goethe University in Frankfurt, Germany. He gave sets of lectures and seminars in Europe - in France, at the Universities of Paris, Orleans and Nice; in the U.K at the Universities of Oxford, and Cambridge, and at East Anglia, Warwick, Essex, and Sussex; in Italy at the Universities of Rome, Milano, Catania and Siena; in Austria at the Universities of Graz and Vienna; in Germany at the Universities of Bremen, Frankfurt, Kiel, Regensburg, and Hanover; in Canada, at Trent University, Waterloo, McGill and HEC-Montreal. And at New South Wales, Melbourne, Newcastle, Adelaide and Sydney in Australia. Many of these lectures were associated with research projects with colleagues in these universities.
Contributions to Economics
Economics and Philosophy
Nell’s best known research on economics and philosophy was a book published in 1975 by Cambridge University Press under the title ‘’Rational Economic Man (coauthored with philosopher Martin Hollis). Since the early 1960s Nell had been critical of the neoclassical research program and had attempted to draw out the unstated assumptions of neoclassical economics and submit them to methodological scrutiny. His 1966 doctoral thesis was on ‘Models of Behavior’. Hollis and Nell (1975) is an extension of that doctoral thesis. In Hollis and Nell (1975), they outline an alternative vision to neo-Classicism based on a rationalist theory of knowledge. They dissect the textbook combination of neo-Classicism and Positivism, so crucial to the defence of orthodox economics against now-familiar objections. Hollis and Nell’s approach to methodology breaks with the traditional approach by focusing on the problems of the applicability of (the then) current neo-Classical theories. Coherent theories, describing the behaviour of ‘assumed’ – thus imaginary - rational agents, are developed. But what are the conditions for applying such theories to actual agents? The neo-Classical answer hinges on its view of rational individuals.
Theory of Money and Finance
• His first papers, in the 1960s, laid the basis for his later work. “Wicksell’s Theory of Circulation”, set out the problem of explaining how money circulates – that is, showing how a given sum of money ‘monetizes’ all the basic economic variables. (It was published by Robert Mundell, then the youngest editor of the JPE, and was the start of lifelong friendship.)
• He also developed the Theory of Monetary Circulation, showing how a given sum of money can ‘monetize’ all the transactions of a capitalist economy, tracing the flow of goods and services in reverse, as it were, and in the process defining a unit of account (incidentally solving the ancient riddle of ‘an invariable measure of value’ – insofar as it is soluble.) And, of course, the monetary system itself develops in the process of transformational growth. In many ways Nell’s approach goes back to Francois Quesnay; where money traced out the transactions between the different classes and sectors of society. Although Wassily Leontief was best known for his ‘Input Output Model’, a major contribution to economic analysis could be found in his doctoral thesis, done in 1928 at the University of Berlin, on ‘Economics as a Circulation’ (in German "Wirtschaft als Kreislauf."), under the direction of L.Von Bortkiewicz and Werner Sombart. This work helped to influence Nell’s vision of ‘Monetary Circulation’. (Although they had met previously he came to know Leontief when he founded the Institute of Economic Analysis in N.Y; later he met and appreciated Faye Duchin and others there. He particularly appreciated their studies of wage-profit relations, and the work on input-output and the environment). Hicks (1967) noted the difference between the ‘transactions demand’, which rested on structure and contracts, and the speculative demand which he described as a ‘voluntary’ matter, a proper subject for the theory of choice. Tobin and Modigliani both analyze the decision to hold money; Nell, following Wicksell and the early Quantity Theorists, is concerned with the pattern according to which it is spent, to determine how much money is required to ensure that all transactions are fully ‘monetized’. These questions stem from Quesnay, via Leontief.
• Like Mundell, Nell places himself at the intersection of three theoretical schools: Keynesian, monetarist, and Ricardian. Each camp contributes something of value to economic analysis and policymaking. For Mundell, Keynesians contribute the multiplier effect of federal budgets for stabilization; Monetarists, monetary stability for encouraging growth-promoting investments; and the Ricardians, the importance of free trade and investment flows for maximizing social welfare. Nell draws in the same way on the Keynesians, but looks to the older Quantity Theorists for accounts of monetary circulation, and draws on the Ricardians for the theory of value while he looks to Schumpeter for an approach to innovation and competition.
• In 2004 “Monetizing the Classical Equations,” which had been circulating for three years was finally published. Along with his 2003 paper for the Joan Robinson Conference, and an earlier paper for the Sraffa Conference in 2000, it finally pulls the story of monetary circulation together, detailing how the pressures of transformational growth – including the emergence of fixed capital and the finance necessary for it - led to systematic changes first in the monetary system, then in banking, with the result that the way the interest rate is determined changed significantly.
General Theory of Transformational Growth
• The first statement of the theory of transformational growth came in 1988 in his book ‘’Prosperity and Public Spending’’, laying out the idea that markets worked differently when technology was craft-based. Costs were structured differently, and it made sense that prices would be flexible, but employment would tend to be inflexible. This gave rise to incentives to change the structure of costs, however, leading to Mass Production, and cost conditions in which it makes sense to hold prices steady and vary employment.
• The full development of the theory of transformational growth came in the 90s, and was published as The General Theory of Transformational Growth (Cambridge University Press, 1998), starting from a critique of equilibrium –supporting creative destruction instead – working through methodological and philosophical questions about the role of contracts and obligations in understanding the persistence of institutional structures, to the circulation of money, understanding productivity and the structure of production – especially the relationship between the wage bill of capital goods and the capital requirements in consumer goods – then going on to dynamics, and from there to aggregate demand and the business cycle. ‘Investment’ must be separated into two steps: investment planning, which depends on innovation and requires planning for prices and costs, and investment spending, which depends on earnings and finance. There can be no single, simple “investment function” which sums this up; macro models have to be reconstructed. Finally the book concludes by examining the interactions between economic forces and pressures and the changing character of social institutions.
• Nell is the originator of the Theory of ‘Transformational Growth’, which traces the pattern of capitalist development through a succession of stages, in each of which markets adjust differently, and in doing so, give rise to market pressures leading to innovations which move the system to the next stage. In each stage the working of markets will be governed in part by the structure of costs and the pattern of growth in demand, both of which depend on technology and innovation. The approach draws on the empirical work of Simon Kuznets, and makes use of Nicholas Kaldor’s notion of stylized facts; it also draws on the work of W. Arthur Lewis and Gunnar Myrdal in regard to stages of development. It is, however, consistent only in part with Robert Solow’s neo-Classical approach; as in that construction the substitution of capital for labor is crucial. However, transformational growth rejects the idea of a steady state and presents a model of multiple sectors regularly changing in size and importance. On the other hand, Douglass North’s emphasis on institutions is echoed here. Nell argued that understanding capitalist development is still beyond the capabilities of economic theory, at least in its formalized version. Intrinsically innovative, uneven across sectors and countries, and evolving through qualitative changes in institutional structure, development involves such complexity that major insights, including those of Marx, Keynes, Veblen, Schumpter, Hirschman, Myrdal, Braudel often come from outside formal theory. The usefulness of these insights suggests that theory must be reconceptualized to understand capitalist development. Nell’s General Theory of Transformational Growth (TG) approach attempts such a reconceptualization. It portrays development as a cumulative process in which economic institutions and technologies evolve in a single, mutually engendering dynamic. Nell’s TG approach gives theory the task to of understanding this cummulative process. In the TG approach, markets generate innovations, most importantly technological changes, and these innovations restructure markets. This process imparts a direction to capitalist development as sectors rise and fall, production is reorganized, and markets are reshaped.
• In contrast to many conventional theories, the economic analysis which supports the transformational growth perspective is not based primarily on rational choice. There is a place for rational choice, and for equilibrium theory, but in Nell’s view it is a subordinate place – and much of the activity there will be prescriptive rather than descriptive. Actual markets are always in motion; equilibrium is rare and dynamic analysis necessary.
• The methodology/philosophy which underlies the Theory of Transformational Growth is a form of realism, based on filling in ‘conceptual truths’ by doing fieldwork and then building models of solidly based institutionally grounded relationships. The result will be open models, which can only be closed temporarily by ‘setting’ certain inherently unreliable relationships. This has implications for econometrics – not all economic relationships are on a par. Some are reliable and can be reliably established; others are inherently unreliable, especially those which are forward-looking. They are likely to change ‘spontaneously’. They have to be estimated on a temporary basis by fieldwork and good guessing. Nor is there anything wrong with this. But it means that an econometric model must be divided into two parts – the reliable relationships and the volatile ones.
• Transformational growth had a major impact on government and government policy, bringing about a countercyclical federal budget, and important changes in the agenda of government. To study these policy changes called for further development of the simple theory of effective demand. Changes in the flexibility of prices required study of pricing, and competition among corporations. Profits functioned as business saving, becoming more important in the US than household saving, and had to be understood in relation to prices (markups) and investment, to which they were closely linked, both in theory and in fact.
• Nell’s published and unpublished papers dealing with these and other issues were collected in Transformational Growth and Effective Demand. This was intended at the time to provide as comprehensive a statement of an alternative approach as possible. In retrospect, however, it only partly succeeds; there is no discussion of money, credit and banking. Circulation was left out, because at that time the theory had not been completed. And the theory of transformational growth was only sketched. However, the historical sections and the theory of effective demand are presented very well.
• When this came out it was supported by a separate volume, Transformational Growth and the Business Cycle, containing the work of a study group of New School students, testing the empirical validity of the approach, by examining the time series of prices, wages, employment, output and productivity in six countries. About the same time Nell wrote Making Sense of a Changing Economy laying out the ‘paradoxes of individualism’, and providing both a critique of the social philosophy of individualism and suggestions for a more satisfactory approach.
• The shift from Craft to Mass Production leads to new policy requirements; it calls for what Abba Lerner called ‘Functional Finance’, but this approach fell out of favor during the difficult times following the oil shocks. There was a widespread, if temporary, experiment with monetarism, and a lasting disillusionment with ‘fine tuning’ and demand management. But the basics of functional finance are sound, and reflect understanding of modern (fiat and credit-based) money, money which has no ‘anchor’. Reviving this approach today leads to the program for an “employer of last resort”, (ELR). This offers a policy framework that will support full employment, while constraining inflation. It offers an opportunity to fulfill many social objectives as well. And it takes advantage of transformational growth, which changes the Federal budget from neutral or pro-cyclical to counter-cyclical.
• A further implication of transformational growth is that if there is substantial mobility of labor and capital, exchange rates will deviate from purchasing power parity only because of speculative pressures. In other words, a universal currency, such as that proposed by Nobel Laureate Robert Mundell, would not only be desirable, it would appear to be a natural culmination of the processes of transformational growth.
Econometrics and Philosophy
More recently Nell has worked with his colleague Karim Errouaki on the methodological foundations of structural econometrics. The position exposed by Nell and Hollis (1975)’s ‘Rational Economic Man’ was further extended and developed in their recent book (‘’Rational Econometric Man’’, Edward Elgar, 2011). They argued that is not too farfetched to see Hollis and Nell (1975) ‘’Rational Economic Man’’ as a foundation for reconstructing the scientific foundations of structural econometrics; one might say ‘’Rational Econometric Man.’’ They argued that there are good reasons for considering Hollis and Nell’s (1975) framework as a foundation for reconstructing structural econometrics, a foundation that complements and extends the original ideas of Haavelmo. Haavelmo’s (1944) work is probably the most important landmark in the history of econometric modelling. It is a remarkable monograph which, unfortunately for econometrics, became a classic much too early, part of the reason it is misunderstood. a foundation that complements and extends the original ideas of Haavelmo. Haavelmo’s (1944) work is probably the most important landmark in the history of econometric modelling. It is a remarkable monograph which, unfortunately for econometrics, became a classic much too early, part of the reason it is misunderstood. They present their distinctive methodological contribution as a blend of fieldwork and conceptual analysis designed to ensure that their models are well grounded in reality and at the same time, conceptually coherent as well as statistically adequate. In so doing, they also outline a number of elements that will be needed to develop a ‘good’ macro-econometric model of an advanced economy.
Development Economics
More recently, Nell has worked with his two colleagues Federico Mayor Zaragoza (Former Director General of UNESCO and President Founder of the Foundation Culture of Peace, Madrid) and Karim Errouaki (Former Special Advisor to the former UN SG and International Expert in Finance & Geopolitics and Special Advisor to the President of the Foundation Culture of Peace) on ‘’Reinventing Globalization after the Crash (forthcoming in 2012). The book is based on material provided by Federico Mayor Zaragoza’s book ‘’The World Ahead’’ (Zed Books, UNESCO, 2001), revisited and animated by the theoretical framework put forward by Nell in his opus magnum book ‘’Transformational Growth’’ (Cambridge University Press, 1998) and extended by Karim Errouaki (UM, HEC-Montreal, 2002) who argued that ‘Transformational Growth’ provides a new vision and a new framework, for thinking about economic development, bringing it into the framework of economic history. The purpose of the book, which is embodied in their title, is to re-invent globalization in a way that it will ensure that globalization is only profitable and sustainable -the subject of many studies- but it will result in human development. They want to suggest ways to recreate global economy as to humanize it.
OXFORD ECONOMIC GROWTH PR0JECT
This book is edited by Nell and will be published by Oxford University Press in 2012. The main volume, introducing the series, should comprise four parts, beginning with a discussion of basic method and approach – the philosophy of economics as it applies to growth – then moving to consideration of the basic competing (or complementary) theoretical frameworks explaining and analyzing growth, going on then to applications and policies, and concluding with a survey of the place occupied by the analysis of economic growth – in the light of history - in the history of economic thought.
The Neo-Classical theory of economic growth presents a model of equilibrium and balance, based on flexible substitution between factors of production. To be sure this can be modified in many ways, and even turned into a disequilibrium theory. But it falls very far short of even beginning to picture what actually happens over time in the history of today’s economies – or yesterday’s. The project here is to set forth the reasons for insisting on alternatives to the neo-Classical theories, and then to survey and examine those alternatives.
BOOKS
• Rational Economic Man (with Martin Hollis), Cambridge: Cambridge University Press, 1975. (Portuguese translation published in Sao Paulo, Brazil by Zahir Editores. Japanese translation.)
• Growth, Profits and Property, edited by E.J. Nell, Cambridge: Cambridge University Press, 1980.
• Demanda Efectiva, Precios y Salarios, (edited and translated by A.Schneider), Mexico: Editorial Trillas, Mexico, 1983.
• Historia y Teoria Economica, edited by A. Barcelo y Lluis Argemi, Barcelona, Spain: Editorial Critica, Grijalbo, 1984.
• Free Market Conservatism: A Critique of Theory and Practice, London, UK: George Allen and Unwin, 1984.
• Prosperity and Public Spending: Tranformational Growth and the Role of the State, London, UK: Unwin and Hyman, 1988.
• Nicholas Kaldor and Mainstream Economics: Confrontation and Convergence, edited with Willi Semmler, Essays from the Kaldor Conference, London, UK: Macmillan, 1991.
• Transformational Growth and Effective Demand, London, UK: Macmillan, 1992.
• Beyond the Steady State: Essays in the Revival of Growth Theory, edited with Joseph Halevi and David Laibman, London, UK: Macmillan, 1992.
• Economics as Worldly Philosophy: Essays in Honor of Robert Heilbroner, edited with Jaspal Chatha and Ron Blackwell, London, UK: Macmillan, 1992.
• Money in Motion, edited with Ghislain Deleplace, London, UK: Macmillan, 1995.
• Making Sense of a Changing Economy. Routledge: London and New York, 1996
• The General Theory of Transformational Growth: Keynes After Sraffa. Cambridge University Press, 1998.
• Transformational Growth and the Business Cycle, London,. Routledge, 1998.
• Reinventing Functional Finance, ed w. M. Forstater; Cheltenham: Edward Elgar,2003
• The State The Market and the Euro, E.Elgar, 2003
• Rational Economic Man (with Martin Hollis), Cambridge: Cambridge University Press, second edition, 2006.
• Rational Econometric Man: Transforming Structural Econometrics, with Karim Errouaki; E. Elgar, 2011.
• Reinventing Globalization after the Crash, with Federico Mayor Zaragoza and Karim Errouaki, forthcoming in 2012.
• Hard Drugs and Easy Money, with Federico Mayor Zaragoza and Karim Errouaki (with the assistance of M. Nell), forthcoming in 2012.
• Leviathan’s Wallet, with Ray Majewski (with the assistance of Jacob Nell) forthcoming. • Iraq, Oil and the World Economy with Willi Semmler, forthcoming.
• Towards a New Paradigm in Development Economics, with Karim Errouaki, and Federico Mayor Zaragoza, forthcoming.
• Le Statut Scientifique de la Méthodologie Econométrique, with Karim Errouaki, forthcoming.
• Economics and Management in dialogue: Reinventing Management (Organizational Strategies through the Transformational Growth Lens), with Karim Errouaki, and Pr. Federico Mayor Zaragoza, forthcoming.
• The General Theory of Transformational Growth, second edition, forthcoming.
• Rationality, Action and Value in the Philosophy of Social Science, Martin Hollis Memorial Conference, edited with Brendan Hogan and Karim Errouaki, forthcoming.
Articles:
Over 100 articles in professional economics journals and edited volumes; 6 articles in professional philosophy journals; numerous articles in popular magazines, TV interviews.