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Abstract. On the methodological plain this paper outlines the conditions that contribute to the development of economic theories and it continues with an examination of the concrete circumstances that gave rise to modern neoclassical macroeconomic theories. The paper further claims that the current impasse in macroeconomics is indicative of the need for new directions in economic theory which becomes imperative in the long economic downturn that started in 2007 and concludes by suggesting the need for a synthesis between the classical analysis and the theory of effective demand.
Keywords: classical approach, neoclassical theory, theory of value, effective demand, paradigm change
Introduction
In this paper, we attempt a brief and at the same time critical review of the salient features of each school of economic thought that withstood the test of time and is still fuelling with ideas and arguments for the conduct of economic policy. Furthermore, our interest focuses on the nature of economic theory and its future; inasmuch, as our analysis is conducted over very long stretches of time, whereby the phases of economic growth are followed by economic downturns in a long wave-like evolutionary pattern.
This paper advances the claim that new economic theories might be the result of four non-mutually exclusive conditions: first, a new theory might be the product of the elaboration of an existing theory; second, it might be the outcome of systematic failures of the dominant theory to account for phenomena that it was designed to explain; third, it may lead to economic policy conclusions that are more relevant to dealing with current problems than the policies proposed by the existing and prevailing theory and last, but not least, a theory may prevail on the basis of the interests that it serves regardless of its ability to aid in prediction and the formulation of economic policy. When at least one of these conditions is met, then various adjustment processes might be activated that could lead to the further advancement of an existing theory, or even the replacement of a prevailing theory by an altogether new theory. In order to establish our claim, we combine economic history and the history of economic thought. The intuitive idea is that economic history constitutes the testing terrain for economic theory, thus enabling...