Poverty has been a factor in history almost since time immemorial. It is only since the Industrial Revolution in the late eighteenth century that the idea of mass material well-being has become possible. Political Economy began around that time in Britain, France and Italy. In England at the time, the relief of the poor was supervised by the Church in every parish. Those who could not work – the elderly, the disabled, women with children – were called paupers. They received relief from rates collected by the Church from the local better-off households. The category ‘poor’ was applied to daily workers, mainly working on the land, who received a wage which traditionally was enough to feed the worker, his wife and their children.

It was when inflation of wheat (corn) prices occurred in the decade following the French Revolution that rates were collected for the working poor as well. At this stage Thomas Malthus conceived the idea that population grew at a geometric rate but food output only at arithmetic rate, hence there was a danger of overpopulation. His real purpose was to say that the working poor should not receive payments in addition to their wage since they would only breed more children and the money (paid in rates by the rich) would be wasted. David Ricardo, the most influential economist of his time and for centuries later, confirmed Malthus’s view.

Political Economy became hostile to any idea of relieving poverty as inimical to the laws of the market. It took a century of democratic struggle to broaden the franchise as well as the First World War to bring about a universal franchise. It was then that the idea of income redistribution from the rich to the poor was introduced in Political Economy by Arthur Cecil Pigou (I have discussed this in my Poverty of Political Economy, Harper and Collins, 2023).

It took another world war to establish the idea that relief of poverty was the task of the government. This was especially so because democracy had spread across the world. International agencies were set up and began to make comparisons between nations. We became conscious of advanced versus emerging economies.

Hayek is recognized as the philosopher/economist who championed liberty and opposed socialism. Marx, especially after the experience of bolshevism, is seen as the high priest, if not the god, of socialism and the enemy of liberty. Hayek is thus anti-Marx as he is also anti-Keynes. Yet there are few direct references to Marx in Hayek's writings; and Marxists, for most of the period when Hayek was writing and beyond, have ignored him. (Gamble 1996 is a notable exception.) Democratic socialists or social democrats engaged in the debates about socialist calculation with Hayek much more in the 1930s (Hayek 1935b; Durbin 1985). By the time Hayek wrote his final book, The Fatal Conceit: The Errors of Socialism (1988), the Soviet Union was close to collapse and socialism as a doctrine had become beleaguered. Hayek was celebrated as the philosopher who inspired those who subverted the Soviet empire in Eastern Europe. But it could be argued that by then Marx had little to do with Eastern Europe or the Soviet Union (Desai 2002).

Introduction

The theorising of the natural rate of unemployment (NRU) almost simultaneously by Phelps (1967) and Friedman (1968) was a significant step in the halt and ultimately reversal of the Keynes–neoclassical synthesis (neoKeynesian) in the field of macroeconomic theory as well as policy. Both Phelps and Friedman were of course reacting to the Phillips curve which in their view did not have sufficient grounding in neoclassical economics. The central issue was the seeming violation of the homogeneity postulate, since the Phillips curve purported to show a short-run, causal relationship between a nominal variable and a real variable. The neo Keynesians were uncomfortable with this because while they liked the macroeconomic simplicity of the Phillips curve, they also believed in the homogeneity postulate. The empirical/econometric connection between these ideas and the Phillips curve was made in two stages. In the first stage, Lucas and Rapping in two papers reversed the causal ordering between the rate of change of money wages (Δw) and the rate of unemployment (U) from that posited by Phillips, or rather more correctly by Lipsey (1960), (Lucas and Rapping, 1969, 1970; for the argument that Phillips did not have the same notion of causation that Lipsey and others have attributed to him, see Desai 1975, 1984). At this stage, price expectations were taken to be adaptive. In the second stage, Lucas engineered the creative union between rational expectations (RE) and the natural rate hypothesis (NRH), (Lucas, 1973).