Adam’s Fallacy and the Great Recession

It is now a commonplace that we are experiencing the greatest economic crisis since the Great Depression of the 1930s.  The downward trajectory on a global level is similar to the 1930s, though in the United States — the epicenter of the crisis — there are indications that the rate of decline may be slowing.1  The most common name given to this economic meltdown is the “Great Recession,” which acknowledges the relation to the Great Depression, while avoiding the disturbing term “depression” — and therefore too close an identification with the 1930s.  Nomenclature aside, the seriousness of the economic collapse is obvious.  This is one of the great crises in the history of the capitalist economy.  As such it raises issues that are long-term, and that relate not simply to the economy, narrowly conceived, but also to the larger economic-sociological environment of the system.

The severity of the current crisis and the failure of conventional economics to anticipate or account for it draw attention to what radical economist Duncan Foley has called “Adam’s Fallacy.”  Named for Adam Smith, Adam’s Fallacy is “the idea that it is possible to separate an economic sphere of life, in which the pursuit of self-interest is guided by objective laws to a socially beneficent outcome, from the rest of social life, in which the pursuit of self-interest is morally problematic and has to be weighed against other ends.”2   Adam’s Fallacy is thus both an intellectual and moral fallacy — the notion that the economy can, in Polanyi’s terms, be disembedded from the rest of social reality, and that a market system based on individual acquisitiveness can meet the moral needs of society.

Adam’s Fallacy did not reach its zenith in the classical period.  Whereas classical political economy had “strong roots in sociology” and accommodated “emergent categories like class,” today’s marginalist or neoclassical economics admits “no social category that transcends individual action, or the simple combination of individual actions.”3   This extreme view only reached its logical conclusion in the writings of Hayek in the twentieth century, and in the neoliberal tradition that his work eventually gave rise to in our time.

Indeed, if “the most fundamental aspect of the fallacy is to represent capital accumulation, with its accompanying technical and social revolutions, as an autonomous and spontaneous process that is somehow inherent in the expression of ‘human nature,” then there can be little doubt that it has seen its highest development in today’s extreme, neoliberal era.4  Thus we have witnessed in recent decades what John Kenneth Galbraith aptly called, in the title to his last book, The Economics of Innocent Fraud, marked by the “renaming of the system” as the “free market system.”  This is a perfectly meaningless designation meant to draw attention away from the harsh realities of capitalism (and monopoly capitalism): corporations, class power, and social inequality.5  In short, orthodox economics was stripped in the neoliberal era of all remaining historical and sociological content.

Today we often say that we need a new Marx, Veblen, Keynes, or Schumpeter.  But it is not as pure economists that we can be said to need them so much as political economists or economic sociologists, from which most of their greatness derived.  This is also true for later dissident economists such as Kalecki, Sweezy, Minsky, and Galbraith (not to mention economic sociologists arising from within sociology itself such as Weber, Tawney, Polanyi, and Mills).

Once we admit historical, sociological, institutional factors into our analysis of the economy, Adam’s Fallacy falls away and the Great Recession ceases to be incomprehensible.  All sorts of useful debates can then arise.  By way of illustration, I would like to point to the analysis of the current crisis that Fred Magdoff and I have provided in our recent book, The Great Financial Crisis: Causes and Consequences (2009).6  In this argument, written over three years, we do not claim any substantial originality.  Rather we draw on most of the economic sociologists mentioned above — but especially Marx, Kalecki, and Sweezy — as well as on recent history, in order to make arguments that we think should be fairly obvious to social scientists.

Although influenced from many directions, our work, we stress, is rooted in the Marxian tradition.  Schumpeter once observed that a sharp distinction between economic theory and economic sociology was “completely non-Marxist.”  For Marx categories such as class were equally economic and sociological in a way that was entirely foreign to mainstream social science.  Compared to the sterile conception of “class” when it appears in orthodox economics, Marx’s concept of social class, Schumpeter wrote, “is a living, feeling, acting sociological entity.”7  This points to the strong resistance to Adam’s Fallacy within Marxism, giving it an advantage in dealing with structural contradictions of the system.  From a Marxian dialectical perspective, the social world cannot be looked at exclusively in either economic or non-economic terms.

Growing out of the earlier work of Marxian political economists Paul Baran and Paul Sweezy in Monopoly Capital, our book challenges the prevailing assumption that the capitalist economy naturally promotes rapid growth and full employment equilibrium — a viewpoint that makes persistent unemployment, underemployment, and slow growth anomalies that need to be explained.8  Rather we argue the opposite — slow growth, rising unemployment, underemployment, and excess productive capacity comprise the normaltendency under monopoly capitalism.  In this view, rapid growth and full employment, as in the “golden age” of the 1950s and ’60s, are the anomalies that need to be explained.

The virtue of this approach is that it conforms much more closely to reality.  The advanced capitalist economy has been plagued by creeping stagnation for most of the post-Second World War period (not to mention the prewar 1930s).  The rate of growth of the U.S. economy was slower in the 1970s than in the 1960s.  It was slower in the 1980s and ’90s than in the 1970s.  And it was slower in the 2000s up to 2007 than in the 1990s.  Since late 2007 the economy has plummeted.  All of this can be traced, in the main, to a system of monopolistic profits and pricing and to growing inequality in income and wealth.  Real wages in the United States were at the same level in 2007 as in 1967 — even as profits, CEO salaries, income and wealth inequality, and financial speculation hit the stratosphere!

Barring the unlikely emergence of a Schumpeterian epoch-making innovation on the scale of the railroad and the automobile — and even the computer-digital revolution didn’t come close in this respect — the system tends to a shortage of profitable investment outlets (due to inequality and market saturation).  Hence, in order to continue growing at a pace sufficient to hold off a widening underemployment gap, exogenous forces, or special historical/sociological stimuli not due to the internal logic of the accumulation system, have to enter in.  For much of the post-Second World War period, this was provided to a considerable degree by military spending, which, however, gradually began to be lose its effectiveness as a stimulus for a variety of reasons by the 1970s.

From the 1980s on, the main prop to the economic system was provided by the fiancialization of the capitalist economy.  Unable to find outlets for their enormous and growing investment-seeking surplus (the product of widening profit margins at any given level of output), corporations increasingly speculated in asset prices, i.e. paper claims to wealth, thereby boosting the economy for a time.  Pioneered in the United States, financialization — understood as a secular shift in the center of gravity of the system from production to finance — was aided and abetted by banks and other financial institutions.  They created more and more and more exotic financial instruments to accommodate the massive funds seeking speculative outlets.  The result was a series of financial bubbles, each bigger and more fragile than the last, creating a vast financial superstructure on top of a stagnating productive economy.  The financial balloon lifted the economy but ultimately ran into a contradiction, given the underlying weakness of the real economy from which it derived.

It was clear from the start that financialization could not solve the underlying problem of stagnation, and that a reckoning — what economists call a mean reversion in which finance would be brought more in line with the slow growth of the underlying economy — would eventually have to occur.  When and how this would happen, however, was not so clear, since Federal Reserve and other central banks intervened in periodic credit crunches as lenders of last resort, supporting a succession of financial bubbles.  At some point, though, it was to be expected that the whole worsening problem would become unmanageable.  This general point had been made in Monthly Review for some time.  But by 2006, as indicated in our piece “The Household Debt Bubble” (included in our book), we had concluded in more concrete terms that working-class household finance had been so destroyed by financialization, and by the emergence of a housing bubble, that the time for this strategy of accumulation was running out, and that a crisis of financialization was increasingly likely.  This whole story of the rise of what we refer to as “monopoly-finance capital,” and its relation to class, corporate power, state finance, and the global economy, is traced throughout our book, which concludes with an account of the crash.  We end by observing that there is no easy way out for humanity (and none for the system) under these circumstances, and that radical change is called for.

All of this points to the fact that we live in an age when more than ever before the world demands a radical synthesis: of the kind potentially offered by political economy, economic sociology, and ecological economics.  The closed world of make-believe neoclassical economic models, of Adam’s Fallacy, has become a growing threat to the planet and all who live in it.9



1  Barry Eichengreen and Kevin H. O’Rourke, “A Tale of Two Depressions,” Vox, original article April 6, 2009, updated June 4, 2009, <>.

2  Duncan Foley, Adam’s Fallacy: A Guide to Economic Theology (Cambridge, Massachusetts: Harvard University Press, 2006), xiii.

3  Foley, Adam’s Fallacy, 155.

4  Foley, Adam’s Fallacy, 224.

5  John Kenneth Galbraith, The Economics of Innocent Fraud (Boston: Houghton Mifflin, 2004).

6  John Bellamy Foster and Fred Magdoff, The Great Financial Crisis: Causes and Consequences (New York: Monthly Review Press, 2009).

7  Joseph Schumpeter, Essays (Cambridge, Massachusetts: Addison-Wesley Press, 1951), 286.

8 Paul A. Baran and Paul M. Sweezy, Monopoly Capital (New York: Monthly Review Press, 1966).  Baran and Sweezy’s analysis was carried forward and applied to issues of financialization in particular in the subsequent work of Harry Magdoff and Paul Sweezy from the late 1960s to the 1990s.

9 On the even more serious ecological dangers of our current economic way of life see John Bellamy Foster, The Ecological Revolution (New York: Monthly Review Press, 2009).  See also Richard York, Brett Clark, and John Bellamy Foster, “Capitalism in Wonderland,” Monthly Review, vol. 61, no. 1 (May 2009), 1-18.

John Bellamy Foster is editor of Monthly Review, and professor of sociology at the University of Oregon, and author of The Great Financial Crisis: Causes and Consequences (with Fred Magdoff), Critique of Intelligent Design (with Brett Clark and Richard York), Naked Imperialism, Ecology Against Capitalism, Marx’s Ecology, The Vulnerable Planet, and The Theory of Monopoly Capitalism. This article was first published in the summer issue of Accounts, the newsletter of the Economic Sociology section of the American Sociological Association.  

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