The Real Economy

The following is an adapted excerpt from The Real Economy, published on February 25, 2025, by Princeton University Press.

No discipline in the humanities or social sciences today has a convincing theory of the economy. Long preoccupied with honing methods, the core of the discipline of economics has abandoned investigation into what the economy really is. Preoccupied with either appropriating or criticizing the methods of economics, other disciplines have failed to articulate any alternative conceptions of the economy.

A conspicuous absence of a convincing theory is what prevails today, but it was not always the case. In the period stretching from 1890 to 1930, when the modern discipline of economics was formed, fierce debates raged, as many different “visions” of the economy, as the economist Joseph Schumpeter once put it, circulated and competed with one another. This period—after Marx made the last great contribution to “political economy” but before the triumph of “neoclassical” economics—was a moment of “methodological pluralism.” For figures like Schumpeter, the subject of economics was by no means obvious. Rather, the very task of positing an economic problem, he wrote, would require that, “we should first have to visualize a distinct set of coherent phenomena as a worthwhile object of our analytic efforts.”

In my encounter with these “years of high theory,” as one chronicler characterized them, the economics of Keynes and Veblen have loomed the largest. Veblen and Keynes were economic theorists writing before neoclassicals transformed economic theory into an entirely mathematical affair, and both preferred verbal exposition (Veblen nearly exclusively). Keynes entitled his most important books Treatise on Money and The General Theory, and Veblen, The Theory of the Leisure Class and The Theory of Business Enterprise. While these texts stand today as the most notable from the period, the economic visions of a great many twentieth-century economic theorists also crossed diverse institutionalist, post-Keynesian, Marxist, Austrian, French Regulation, and even neoclassical traditions—from Irving Fisher to John Hicks, Joseph Schumpeter, Frank Knight, Joan Robinson, Albert Hirschman, Nicholas Kaldor, and others. If in different ways, all first cultivated or sought to carry forward the rich legacies of pre-World War II economic theory.

By revisiting traditions of literary economic theorizing that, if not completely lost, have long been overshadowed in the discipline of economics, and have not often been considered outside of it, my goal is to articulate a theory of the economy that is open to rich empirical study from multiple disciplinary and methodological perspectives, across the social sciences and humanities. Perhaps the effort will be of interest to contemporary economists, working in any tradition. No less, my ambition is to convince non-economists in the interpretive social sciences and humanities that there are traditions in economic theory of ecumenical interest as traditions in, say, philosophy, social theory, cultural theory, or political theory. Of course, I also wish to convince historians that it is worth conceptualizing the economy in the ways outlined here. Finally, while I believe this effort can help sharpen capitalism as a category of analysis, for it to succeed the theorization of the economy must be more generally valuable, beyond capitalism—including for understanding what kind of economy existed before capitalism, and what it would mean for an economy to come after it.

Neoclassical economics and the real

Economics abandoned a subject matter for a method in the decades after World War II, with the triumph of “neoclassical” economics, as Veblen first branded the paradigm in 1900. In the first half of the twentieth century, economics was intensely divided about whether to focus upon a subject or a method, as well as—not unrelatedly—which subjects and which methods. While the other social science disciplines of the twentieth century debated and fixed their subjects, sorting and cycling through methods, economics became an overwhelmingly methods-focused discipline. Perhaps only philosophy—tellingly, an avowedly metaphysical enterprise—can rival economics in this respect. To state the point most provocatively: economics has no subject. That helps explain its great success as the most “imperialist” social science. Fixated on method, economics began to freely roam across a great many subjects.

The argument over subject conveyed a long inheritance that went back at least as far as the eighteenth- and nineteenth-century project of “political economy.” Here is how Adam Smith defined political economy in An Inquiry into the Nature and Causes of the Wealth of Nations (1776):

considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or common- wealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign.¹

The object of political economy defined its subject: the absolute generation of wealth, either in the form of subsistence or of revenue. A little more than a century later, the Cambridge economist Alfred Marshall began his Principles of Economics (1890), a landmark in the transition from political economy to economics, with this first sentence: “Political economy or economics is a study of mankind in the ordinary business of life; it inquires how he gets his income and how he uses it. Thus it is on the one side a study of wealth; and on the other, and more important side, a part of the study of man.”

Marshall still emphasized the “study of wealth.” At the time, so too did rival schools of economics, including the German historical school, then at its peak at the turn of the twentieth century. In one representative German textbook, the economy referred to “all those processes and arrangements that are directed to the constant supply of human beings with material goods.” Material goods kept an accent on wealth. After World War I, US-based institutionalist economics, influenced by the fleeting German historical school and claiming inspiration from Veblen, did too. Walter H. Hamilton’s “The Institutional Approach to Economic Theory,” the address to the American Economics Association that first named that school, related that approach to the study of “material wealth.”² In the 1930s, John Maynard Keynes, in his rebellion from Marshall, his teacher, sought to invent a new “theory of output as a whole,” or, as he called it, “the wealth of the community.”³ During the interwar moment of methodological pluralism in the budding academic discipline of economics, the study of wealth—a subject—was prevalent, even if the method or methods compatible with it were not at all agreed upon.

But the more important aspect, as Marshall formulated in his Principles of Economics, was economics as “the study of man.” On this side, Marshall contributed to the “marginalist revolution” in economic theories of value—relative value, not absolute wealth.⁴ With this revolution, neoclassical economics was born, and with Marshall it rose into the mainstream. As Hamilton noted, what he called “value economics” was a second, distinct tradition in contrast to what Marshall called “the study of wealth,” or what we might call by contrast “wealth economics.” It went at least as far back as Smith, too. The relative values of goods in exchange, why people value some things relative to others, had greatly concerned Smith and the generations of political economists who followed in his wake. That included Marx, who by relating his Ricardian-inspired labor theory of value to his “law of capitalist accumulation” made the greatest attempt ever to completely integrate an economics of (absolute) wealth to an economics of (relative) value.

The neoclassical marginalist revolution focused on transforming value economics, setting wealth economics to the side. By contrast to political economists from Smith to Marx, who argued for objective, cost-of-production theories of relative value, Marshall and his peers advocated a psychological and subjective theory of utility satisfaction at the margin. The theory posited a form of economizing behavior or conduct.

However, the marginalist theory of value was not the only account of economic behavior at this time. Consider Max Weber’s struggles to define the “concept of economy” upon his appointment as a professor of economics (not sociology!) at Freiberg in 1898, replacing a member of the German historical school.⁵ Weber declared in the posthumous Economy and Society that, while avoiding “the much-debated concept of ‘value’” it was still possible to theorize “economy.” Weber focused on “economic activity,” by which he meant “careful choice among ends,” or “rational calculation.” This required a sociological account of valorization, without committing to the full-blown axiomatic theory of “relative value” that marginalists advocated.⁶

Soon, as Hamilton noted, US institutionalists were also preoccupied with economic activity, appealing to “instinct, impulse, and other qualities of human behavior,” including the institutional processes of economic valuation that could not be reduced to neoclassical axioms.⁷ Keynes’s General Theory underscored the various “propensities,” “motives,” and “preferences” that explained the contingent valuation of capital assets, as well as the investment and consumption choices that determined “output as a whole.”⁸

When neoclassical economics triumphed after World War II, what prevailed was marginalist value economics refashioned as a generalized method for an extraordinarily unspecified subject, the “study of man.” There was no longer any attempt to link this economics back to the study of wealth. It was Lionel Robbins who in 1932 defined economics with respect to a certain kind of conduct alone, abjuring wealth altogether. Economics, Robbins wrote, is “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”⁹

The definition captured several important stipulations of what became, broadly speaking, twentieth-century “microeconomics,” a term that first emerged during the 1930s. Its great founding text was John Hicks’s Value and Capital, written by Robbins’s London School of Economics junior colleague. Value and Capital barely referred to the economy at all. When it did, passingly, Hicks inferred that the economy was nothing more than the sum composed by the “preferences of the individuals” in it. Hicks’s inspiration was the Frenchmen Léon Walras, a founder of marginalism who first posited the possibility of a “general equilibrium” among all markets. Value and Capital focused on putatively economic topics, whether capital, employment, or consumption, but all from the perspective of a mathematical economics of relative value. The word “wealth” appeared four times in Value and Capital.¹⁰ During the 1930s, Robbins rightly sensed that what was being developed in the neoclassical camp was a generalized method for the study of individual choice under conditions of scarcity and substitution—anywhere it occurred, inside or outside the economy, whatever it might be.

Neoclassical synthesis

During the decades after World War II, together with neoclassicism, Robbins’s definition of economics became hegemonic. In short, rather than wallowing in knotty subject / method problems, neoclassical economists simply chose method over subject and got over it. The shift was subtle. By claiming human behavior and not the economy as its subject, economics claimed for the unique value of its discipline the contribution of a method. To get analytical traction, however, that method required making highly restrictive assumptions about human behavior, which required often excluding subject matters that, by seemingly any possible definition, would count as fundamental to the economy. Doing so, in the latter half of the twentieth century neoclassical economists successfully constructed a highly idealized but extraordinarily powerful method, in which—in the final step—compelling arguments must be expressed, à la Hicks, in mathematical or, relatedly, quantitative form. By jettisoning subject, economists by and large abandoned verbal exposition as well.

At MIT, Samuelson in 1955 first announced the “neoclassical synthesis” between Walrasian general equilibrium microeconomics and a special-case Keynesian macroeconomics of aggregates, the latter applicable when the economy for some reason entered slumps in total output and employment.¹¹ He utilized a new term—“the economy.” As historians and allied scholars have argued, in postwar public debates throughout the world, economists helped discursively fix the economy according to the macroeconomic concepts of output, growth, prices, employment, and development.¹² The legacy is that we still say today, intelligibly, that the economy is growing, is developing, or that employment in it is rising or falling.

But in economics, as opposed to public discourse, the postwar discursive fix was highly unstable.¹³ To his credit, Samuelson would outright admit the logical inconsistency of the neoclassical synthesis—of simply papering over the centuries-old tension, going back to Adam Smith, between the economics of absolute wealth, which leaned toward the study of a subject, and the economics of relative value, which led neoclassicals toward the application of a method. Microeconomics operated on one track, macroeconomics on another. There was no attempt to integrate them while taking each seriously.

Smith had at least tried to integrate his understanding of “economic sentiments” in market exchange with his account of the wealth of nations; Marx had at least tried to integrate his labor theory of value with his law of capitalist accumulation; Weber had at least tried to integrate his sociological theory of “economic activity” to “the economy,” in the sense, as he put it, of “the optimal utilization of given means of production to meet the demand for goods on the part of a given human group”; Keynes had at least tried to integrate his analysis of propensities, motives, and preferences with his macro-theory of output as a whole; Veblen had at least tried to integrate his theory of habit, especially habits of emulation and predation, with his account of pecuniary valuation and wealth ownership. The neoclassical synthesis was far more modest. “The way I finally convinced myself was to just stop worrying about it,” Samuelson would reflect.¹⁴ That was nothing much to be ashamed of. Often, intellectual formations overcome their contradictions therapeutically in this way. They do not solve them; they simply stop worrying over them and move on—if only for a time.

What postwar economists began to worry about most was how to properly reason through models, using mathematics. If the economy now existed, it existed in an idealized world within the logical space of a model, not in the world outside of it. By intent, the discipline began to lose contact with what Marshall called the “ordinary business of life.” For instance, postwar general equilibrium theory required excluding money from standard models by assumption. In a remarkable rhetorical flourish—according to what in 1949 Don Patinkin first named the “classical dichotomy” separating the monetary and the real—what postwar economists began to refer to as the “real economy” excluded money altogether.¹⁵ That is, the closest twentieth-century neoclassical economics ever got to defining the subject matter of the economy was to mathematically model an idealized real economy, in which money is taken to be a nominal factor alone, and does not really exist.

By the 1960s, the Chicago School had begun to look past markets. In The Economic Approach to Human Behavior (1976), Gary Becker cited the Robbins definition approvingly. “The definition of economics in terms of scarce means and competing ends is the most general of all. It defines economics by the nature of the problem to be solved,” regardless of the domain of life in which the problem appears. Economics need not focus on “the market sector,” Becker emphasized. He concluded, “what most distinguishes economics as a discipline from other disciplines in the social sciences is not its subject matter but its approach.”¹⁶ Ronald Coase, famous for importing this approach into the study of legal institutions and inspiring an institutional economics of a very different type than what Hamilton promoted in 1919, approvingly cited both Robbins and Becker before summing up this tradition best when he wrote, “economists have no subject matter. What has been developed is an approach divorced (or which can be divorced) from subject matter.”¹⁷

Thus was launched the imperialism of microeconomic approaches to human behavior across the social sciences, which soon made its mark in political science, law, sociology, and history among other disciplines. The method of economics may have required using strong assumptions about human behavior and its context—Becker cited “maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly”—that to this day make the jaws of most humanists and social scientists who are not economists or sympathetic to their methods drop to the floor. When economists invade their territory, however, mouths close and teeth gnash. For individual choice under conditions of scarcity and substitution really is a problem that often occurs not just in markets, and not just in the economy, however one wants to define it or mark its boundaries, but also elsewhere, in politics, family life, or other social arrangements. Indeed, the method of economics has achieved impressive analytical traction across multiple domains. Of its limits, however, this was all Becker was prepared to concede: “I do not suggest that concepts like the ego and the id, or social norms, are without any scientific content. Only that they are tempting materials … for ad hoc and useless explanations of behavior.”¹⁸

It was in 1988 that Coase declared that economists “have no subject matter.” Their method, born of high abstract theory, could travel anywhere. By then, already important changes were afoot pointing the discipline in new directions. In the 1980s, applied econometrics and applied microeconomics were becoming ever more prominent fields.¹⁹ One explanation for this was the increasing real-world policy influence of microeconomics in the United States during the 1960s, on issues such as crime, poverty, discrimination, and education.²⁰ Yet, trends in macroeconomics—still the most policy-relevant branch of the discipline—cut back in the old direction. The search for “microfoundations” in “rational expectations” starting in the 1970s transformed macroeconomics.²¹ Microeconomics and macroeconomics—relative value and absolute wealth—did not so much finally integrate. Rather, micro largely swallowed macro. As one influential 2010 survey explained:

Many macroeconomists have abandoned traditional empirical work entirely, focusing instead on “computational experiments,” as described … by Kydland and Prescott (1996). In a computational experiment, researchers choose a question, build a (theoretical) model economy, “calibrate” the model so that it mimics the real economy along some key statistical dimensions, and then run a computational experiment by changing model parameters (for example, by changing tax rates or the money supply rule) to address the original question. The last two decades have seen countless studies in this mold, often in a dynamic stochastic general equilibrium framework.²²

By this time, the signifier “real” in economics could either refer to any humdrum empirical reality outside the window of a university academic office, or the idealized “real” of the highly abstract models written from within them. In the above passage, the “real” referred to that reality which exists outside the model. Yet, the brand of macroeconomics being described above, privileging the logical coherence of abstract mathematical models, somehow referred to itself with the moniker “real business cycle theory.” Criticizing this school of macroeconomics in the wake of the global financial crisis of 2007–2008, the economist Paul Romer named it “post-real” economics. In his view, that was how divorced from empirical reality its assumptions had become.

Two senses of the real—critical and constructive

Of course, the disciplinary evolution of economics does not end at the turn of the twenty-first century. The narrative I have offered of its twentieth-century trajectory, focusing on some of the crucial turning points of the postwar era, is admittedly condensed and oversimplified. On the other hand, the issue cannot simply be confined to economics: historians and allied members of the interpretive social sciences and humanities had no theory of the economy either. True, historians wrote outstanding and essential genealogies of the concept “economy,” but this work consciously stopped short of theorizing economy, in a positive sense. Capitalism represented a better option, as it was a concept abundantly theorized, even if contentiously so, by such grand thinkers as Karl Marx, Karl Polanyi, or Max Weber, the initiators of traditions in which labor, the commodity, the market, or instrumental rationality were the central analytical categories, not the economy. But to talk about Capitalism, must we not know what makes an economy capitalist? To know that, surely, must we not know what the economy is?

To work toward a compelling theory of economy, theorists take two approaches—one critical, another constructive. First, there is talk of the real economy when there is confidence in specifying conceptually what the economy is, or where there is faith that it has been positively fixed for good use. Yet, we may also speak of the real when we do not have such faith in a constructed concept. At these moments, critique comes to the fore. We do not want to have momentary conceptual closure. Rather, the desire is to reflexively critique a concept, by destabilizing it.

Obviously, these two senses of the real strain against one another. The question is whether that strain is productive. Is a constructed concept open to productive critique, and is critique productively feeding back into construction or not? Consider twenty-first century economics discourse, where, on the one hand, macroeconomic adherents of real business cycle theory cling to an old concept of the real economy, fixed in the postwar era, that exhibits little empirical curiosity in the world, whereas, on the other hand, adherents of the newfangled credibility revolution, critical of past practices in the discipline, yearn to conduct real world experiments to set economics upon a more secure empirical foundation. When the two “reals” blindly pull against one another this much, that is when a concept may suffer from an intolerable indeterminacy.

In addition to this form of critique, however, another constructive step is necessary to theorize the economy. To construct an adequate account of the economy by simply critiquing neoclassical economics, from whatever standpoint, is highly unlikely. The challenge is to positively construct a theory of the real economy that is open to dialogue with a variety of disciplines—economics and beyond—and is therefore at once sufficiently determinate but also itself open to productive critique and thus genuine conceptual life.

Neither of the two moments of the real, the critical or the constructive, necessarily precedes or is antecedent to the other. There is no ultimate destination, no final determination of what the economy is, really, for all times and places. There is no whole, only partial visions of parts. The real economy must be a plural subject, for there is always process.

The real economy

How might we arrive at an account of the real economy? The first thing to say is that the most consistent perspective on the economy is taken from accounting logics—not equilibrium, optimization, market exchange, labor, the commodity form, class struggle, or some other candidate. In a late-in-life 1986 interview of John Hicks, whose views had changed considerably since authoring the foundational microeconomics treatise Value and Capital,  the questioner noted: “When I read your work, I see balance sheets (Hicks: “Yes”), income statements (“Yes”) and you see their ordering (“Yes”). You also seem to think like an accountant about capital.” Hicks responded, “Yes exactly.”

Whatever the economy is, its reality does not exist independent of our ability to account for it. The origins of accounting practices go as far back as the invention of writing in the ancient Near East, c. 3400 BCE, when the earliest states first sought to account, chiefly, for coerced labor inputs and the storage and distribution of grains that resulted from them—through money, the unit of account and medium of exchange, but not yet the store of value (as it would become under capitalism). Rather than the ancient Greek oikos or early modern political economy, typical starting points for the genealogical origins of the economy, my theorization of the economy is rooted in this ancient accounting origin.

From accounting, I draw nearly all the central conceptual building blocks of the economy, including capital, wealth, income, profit, stock, and flow, as well as the related distinctions between stock / flow and capital / income. I critically trace the intellectual and business histories of these terms. But I also stand back to positively theorize from their basis a concept of the real economy.

My argument is that the storage of wealth over time is the act that first creates the economy. This argument hinges upon the accounting logic that was central to Keynes’s famous attack on Say’s Law, the notion that “supply creates its own demand,” or, as Say himself put it, “products are paid for by products.” Because wealth is stored—whether in the form of granaries, cultivated lands, money, or in some other form—purchasing power traverses over time, and leaks out from any present period. There is therefore always a demand constraint in the economy, though it too may manifest in different ways. The character of this demand constraint, and its possible resolution through the domestication of external sources of demand, initiating new flows of income through investment, defines the economy in tandem with the (also) shifting character of the storage of stocks of wealth.

The real economy is, then, a bounded spatiotemporal order of demand-constrained production, determined by logical accounting relationships among the different stocks of wealth in the economy that generate different flows of income over time. All economies are defined by singular stocks, around which they gravitate. In a capitalist economy specifically, that stock is capital. The theory of capitalism proposed herein is rooted in an economic theory of capital—one stock of wealth among, historically speaking, many. This outline conception of the real economy leaves much to be sketched in, from a variety of different perspectives and disciplines. But it is unabashedly rooted in an economics of wealth. The intent is to restore a refined conception of wealth, or anything produced that is conventionally valued that may be stored over time, as the central subject of the economy.

The Real Economy by Jonathan Levy is available from Princeton University Press.

Footnotes