Palley on The Limits of Minsky’s Financial Instability Hypothesis as an Explanation of the Crisis

I am not sure if this was posted before on Naked Keynesianism; nevertheless, here it is (from Monthly Review).

Thomas I. Palley sent John Bellamy Foster the following article in October 2009 for publication in Monthly Review, accompanied by this note: “I’m hoping it might provoke some discussion and also generate some dialogue and consensus between Marxists (like yourself) and structural Keynesians (like myself).” Palley’s piece addressed (along with much else) the article “Monopoly-Finance Capital and the Paradox of Accumulation” by John Bellamy Foster and Robert W. McChesney in the October 2009 issue of Monthly Review. In the same spirit of promoting dialogue between Marxists and Keynesians on the present crisis, we agreed to publish his contribution, together with a response by Foster and McChesney:

Aside from Keynes, no economist seems to have benefited so much from the financial crisis of 2007-08 as the late Hyman Minsky. The collapse of the sub-prime market in August 2007 has been widely labeled a “Minsky moment,” and many view the subsequent implosion of the financial system and deep recession as confirming Minsky’s “financial instability hypothesis” regarding economic crisis in capitalist economies.

For instance, in August 2007, shortly after the sub-prime market collapsed, the Wall Street Journal devoted a front-page story to Minsky. In November 2007, Charles Calomiris, a leading conservative financial economist associated with the American Enterprise Institute, wrote an article for the VoxEU blog of the mainstream Center for Economic Policy Research, claiming a Minsky moment had not yet arrived. Though Calomiris disputed the nature of the moment, Minsky and his heterodox ideas were the focal point of the analysis. In September 2008, Martin Wolf of the Financial Times openly endorsed Minsky: “What Went Wrong? The Short Answer: Minsky Was Right.” And in May 2009, Paul Krugman posted a blog titled “The Night They Reread Minsky,” which was also the title of his third Lionel Robbins lecture at the London School of Economics...

See rest here

Palley on why Krugman and other New Keynesians are NOT Keynesians

Yes, while it is true that New Keynesians do agree with Post Keynesians (or classical-Keynesians, in the sense of the Old Classical Political Economy School revived by Sraffa) in many policy propositions, like the need for more stimulus, Tom is absolutely right that they do occupy a position in the policy debates which precludes real Keynesian ideas to become more generally accepted.

For the full video go here.

Lord Keynes' List of Heterodox Blogs

Available here. A useful list of blogs, and other pages, for those interested in Post Keynesian, Modern Monetary Theory and other Heterodox discussions in economics.

Lars P. Syll On What’s wrong with IS-LM?

By Lars. P. Syll

Yesterday, David Fields of Naked Keynesianism wondered what was my position on the fact that many heterodox economists would consider the IS-LM framework “to still be relevant if given enough flexibility without neoclassical synthesized elements.”

I will sure come back on this when time admits a more thorough analysis, but let me start by giving at least a tentative answer — focusing on where I think IS-LM doesn’t adequately reflect the width and depth of Keynes’s insights on the workings of modern market economies.

Read the rest here.

ISLM: a further explanation and a defense

I noted before  the traditional representation of the ISLM is problematic. Yet as I also noted the ISLM model can accommodate changes that incorporate the criticisms of classical-Keynesian, post-Keynesian and other heterodox groups. There is no need for an investment function based on the marginal productivity of capital and the principle of substitution. The accelerator can be incorporated, and the inverse relation with the rate of interest would result from the effects of interest rates on other components of demand. Also, endogenous money can be incorporated easily, and for the most part this has been done in New Keynesian models (the ISMP).

In the post (linked by David here) that prompted this sort of defense of a changed ISLM, Lars Syll correctly notes that New Keynesians are often right on policy, but incorrect on theory. And I for the most part agree with Lars intentions. Yet, he suggests that the problem lies in that:

"If macroeconomic models – no matter of what ilk – assume representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypothesis of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable."

As I noted in my debate with Noah Smith, the problem with marginalism (neoclassical economics) is NOT rationality, utility maximization or supply and demand (not quite the same list raised by Lars). Here I would add that although one can certainly add heterogenous agents, assumptions that simplify and assume representative agents maximizing profits, for example, are not really problematic at all. Classical political economists and Marx did assume something like that and still did not reach the conclusion that the system was efficient in the sense of providing full utilization of resources.

Also, the idea that agents use all information per se is not necessarily bad (Tom Palley favors some sort of rational expectations, which he refers to as model consistent; see his old manual here). The problem is that the model used, by New Classical and other mainstream authors, has logical problems. Last but not least equilibrium per se is not a bad concept (on this there is the whole thing that Post Keynesians have inherited from Joan Robinson that makes things confusing for many heterodox economists). Equilibrium is actually quite essential for long-term analysis. And I would actually argue that it is relevant since it DOES have real world applications. In other words, real economies do fluctuate around long-term equilibrium positions that are sub-optimal.

The problem with mainstream theory is the notion of a natural rate, which is based on the principle of substitution which allows for 'factors of production' to be fully utilized. These are the problems that Keynes, by negating the idea of a natural rate, and Sraffa, by showing the logical problems of the principle of substitution, undermined. An ISLM without the natural rate is not only possible, but actually reasonably good as a tool for analyzing real economies.

PS: Note that Keynes wrote to Hicks on the ISLM that: "I found it very interesting and really have next to nothing to say by way of criticism." Keynes did not criticize the investment function in Hicks model, but note that this problem also was integral to the General Theory (GT). And yes Keynes was being nice, but he was nice too about Harrod's review of the GT, but did tell him that he did not mention effective demand.

Paul Davidson and the good old days for workers

Letter from Paul published in The Economist edition of November 2nd.

* SIR – “Labour pains” (November 2nd) pointed out that the share of wages in national income has fallen after being nearly constant for decades after the second world war. During the post-war decades the middle class prospered because of the full-employment policies started by Franklin Roosevelt and continued by both Democratic and Republican presidents and Conservative and Labour governments in Britain.

In this period the growth of union power, enshrined in legislation and policies, pursued the sharing of monopoly rents and profits of corporations with their workers. By the 1970s, however, the seeds were sown for the beginning of the end of middle-class prosperity. The anti-union policies of Ronald Reagan and Margaret Thatcher made it socially and politically popular to see unions as the villains in the economy. This was quickly supplemented by firms outsourcing to foreign countries where an hour’s worth of labour was paid a much lower real wage.

But now, a new threat is growing that will further hollow out the middle class and make even more significant differences in the distribution between the top 1-2% and the rest of society. This threat is automation. You correctly indicate that policymakers should think about broadening capital ownership as a way of boosting income to workers and restoring a prosperous middle class.

For a creative approach to restoring middle-class prosperity, I recommend the work of Professor Robert Ashford in the forthcoming issue of the Journal of Post Keynesian Economics called “Beyond Austerity and Stimulus: Democratising Capital Acquisition With the Earnings of Capital As a Means of Sustainable Growth”. Professor Ashford proposes a capital-ownership broadening policy that big companies adopt to produce enhanced earnings for their employees, customers, and other poor and middle class people; enhanced corporate profit and growth; reduced need for welfare dependence; and enhanced sovereign creditworthiness.

Paul Davidson
Editor
Journal of Post Keynesian Economics
Boynton, Florida

You can see this letter and others here.

Steve Pressman on the origins of the Review of Political Economy (ROPE)

Of particular is Steve's discussion of the scope of the journal, and why it became dedicated to the old political economy tradition. In his words:

Someone suggested that we broaden the scope of the new journal. A first thought was to add institutional economics. I had long been an admirer of John Kenneth Galbraith, someone who bridged the gap between Post Keynesian and institutionalist thought, and supported the suggestion. Geoff Hodgson, who was there and slated to be the Book Review Editor of the new journal, had a strong institutional bent (Hodgson, 1988) and also supported this idea. Such a journal would overlap with both the JPKE and theJournal of Economic Issues to some extent. This suggestion had the benefit of not stepping on anyone's toes. It would provide authors with an opportunity to explore similarities and differences between these two schools of thought as well as to publish papers taking either perspective or criticizing either perspective. Still, there was considerable opposition to the idea. 

I then suggested something a bit different—adding Sraffian or neo-Ricardian economics to the scope of the journal. The publication of Eatwell & Milgate's (1983) critical book on Post Keynesian economics exacerbated the split between the American Post Keynesians and the European Sraffians. Even before publication of this book, there were tensions between these two schools, which surfaced initially at the annual Post Keynesian summer schools held in Trieste, Italy. My idea was to encourage a dialog between Post Keynesians and Sraffians, and to see if it were possible to repair some of the damage that had been done. This proposal also encountered considerable opposition. 

After rejecting a few other suggestions, someone (memory fails, I am not sure who it was) proposed something even more radical—a return to political economy. The idea was to bridge the gap among all the different heterodox traditions in economics, including some of the more market-friendly schools of thought, such as Austrian Economics. We would welcome papers that explored similarities between Post Keynesian and Austrian views of uncertainty, papers that examined the behavioral assumptions in the General Theory and in macroeconomics, papers that approached policy issues from different theoretical perspectives, as well as papers that addressed the overlap among some of the different non-neoclassical paradigms. Somewhat surprisingly, especially given what transpired earlier, this proposal won the endorsement of everyone there. We decided to make the new journal as open and as inclusive as possible. 

The result was a journal seeking to revive the grand tradition of classical political economy. It would publish in virtually every strand of political economy. The statement that is printed on the inside cover of the journal, and appearing on the journal's homepage, boldly proclaims this objective.

Pressman tells the whole story here.

Elgar Companion to Post Keynesian Economics

 A new edition of the Elgar Companion to Post Keynesian Economics edited by John King is out. See more here.

‘The Elgar Companion to Post Keynesian Economics is a comprehensive guide to economic analyses in the tradition of Keynes and the so-called Cambridge (UK) school of economics. The coverage of themes and different theoretical orientations within Post Keynesianism is remarkable and the quality of the various entries is impressive. John King’s invisible hand is responsible for a minimum of overlaps and an optimum in quality and comprehensibility. This book has already proved to be of interest to a wide range of economists and can be expected to continue to do so for a long time to come.’ 

– Heinz D. Kurz, University of Graz, Austria

A note on profit-led/wage-led growth models

By Sergio Cesaratto (Guest blogger)

As a follow up on Matías' post on real exchange rate (RER) and growth I want to make a point about "profit/wage led growth", although this is not central in the discussion about RER/Exports.

1) Profit-led growth:

Variations of the normal rate of profit, as such, have no direct and mechanic influence on gross investment, as often argued by post-Keynesian authors of various persuasions. As such, variations of rn only concern the sphere of income distribution. The latter can in turn influence investment decisions:

• by affecting expected effective demand: a higher/lower rn might, for instance, negatively/positively affect consumption demand if this is affected by lower/higher real wages; or 
• by being connected to the relative bargaining power of the working class and to the necessity for the ruling class to discipline it by regulating the labour reserve army; but this is generally done by using fiscal, monetary and exchange rate policies and not as a coordinated decisions of capitalists to regulate the accumulation rate.

Therefore, a rise of rn, as such, for no reason would positively affect investment. Likewise, a lower rn will, in general, leave gross investment unaffected as long as capitalists fear to bequeath market shares to competitors: each capitalist is homo homini lupus with respect to her classmates. Ça va sans dire that a rise/fall of ra above/below rn will just signal that actual capacity utilization, ua is above/below the normal one, un. In both cases gross investment will vary in order to readjust the degree of capacity utilization and normal profitability - while the long trend of investment is still set by demand for products associated to normal profitability).

A quote from Franklin Serrano* is timely here: “although politically entrepreneurs prefer higher profit margins and normal profit rates, capitalists do not ‘invest as a class’ but according to the existing investment opportunities and the pressure of competition. Their investment decisions are not an inverse function of the level of the normal rate of profits but a positive function of the size of the market. In the long run the size of lucrative investment opportunities depends on the level and rate of growth of effective demand- the demand of those who can pay normal prices (that price that allow firms to obtain the normal rate of profits, which defines the minimum accepted standard of profitability). If effective demand is expanding, whether normal profit margins and rates happen to be ‘high’ or ‘low’, competition and the search for maximum profits impel the firms collectively to expand productive investment.”

2. Wage-led growth:

Level effects, but not the growth effects as in the neo-Kaleckian model. A lower marginal propensity to save will induce be a temporary faster growth, but once capacity has adjusted to the new higher level of effective demand entailed by the stronger Supermultiplier , the economy will return to the former normal growth rate determined by the growth rate of autonomous expenditure. Of course, "temporary faster growth" might be very relevant. But no-wage-led growth, at least in the long run. The reason: wages are an induced component of aggregate demand, therefore they cannot be the driver. Given the other, well known, shortcomings of neo-Kaleckian models, I would conclude that the very concept of profit/wage led growth should be abandoned (sorry!). So Matias is totally correct on this point.

Not sure about his view about the main issue RER/exports. I may agree that sound and fair growth cannot be led by RER devaluation. Though, growth depends also on preserving a competitive RER, as we well (and sadly) now in Italy after the Euro.

PS: My paper on "Neo-Kaleckian and Sraffian controversies on accumulation theory" is here (version June 2013).

* Serrano, F. (2006), "Power Relations and American Macroeconomic Policy, from Bretton Woods to the Floating Dollar Standard," available here.

Marx's monetary analysis and post-Keynesian economics

This paper by Eckhard Hein is, in my opinion, an invaluable guide for assessing the degree to which a synthesis can be constructed between the insights of Marxian political economy, Keynes' (long period) theory of effective demand, and Sraffa's price model, in which the conventional rate of interest is exogenous. Hein provides an articulate framework for how to conceive the foundations for a Classical-Keynesian political economy research program.

How a Post-Keynesian Economist Became a Poster Boy for Controversy

Rochon and Docherty on the future of PK economics

The financial crises led many to believe that neoclassical economics might pay a price for the inability to foresee the unsustainable problems that were at the heart of the crisis. This paper deals with the problems of the mainstream and the possible strategies that heterodox groups, in particular post-Keynesians, might use to gain influence. From the abstract:

This paper examines the reasons for the difficulties Post Keynesian economics has had in supplanting mainstream neoclassical theory and for its resulting marginalization. Three explanations are given: intellectual, sociological and political, where the latter two are largely responsible for the current relationship of Post Keynesian economics to the mainstream. The paper also reviews various strategies for improving the future of Post Keynesian economics, including a focus on methodological issues by maintaining an ‘open systems’ approach; a strategy of ‘embattled survival’; the development of a positive alternative to mainstream economics; a strategy of ‘constructive engagement’ with the mainstream; and a dialogue with policymakers. While the global financial crisis has increased the potential for constructive engagement with the mainstream, significant barriers remain to the effectiveness of this approach. The crisis has, however, enhanced the possibility of engaging directly with policymakers and gaining a greater role in management education.

Read the rest here.

In Defense of Post-Keynesian and Heterodox Economics

New book (and here) edited by Fred Lee and Marc Lavoie (there is a typo on the cover, Mark instead of Marc) forthcoming soon. The book is a response to critics of heterodox economics, mostly friendly critics, who suggest that heterodox economics should change its ways in order to be more respectable and to achieve more pre-eminence. The critics include J. Barkley Rosser, David Colander, John B. Davis, Giuseppe Fontana, Robert Garnett, Bill Gerrard and Richard C. Holt.

From the book jacket:

Post-Keynesian and heterodox economics challenge the mainstream economics theories that dominate the teaching at universities and government economic policies. And it was these latter theories that helped to cause the great depression the United States and the rest of the world is in. However, most economists and the top 1% do not want mainstream theories challenged—for to do so would mean questioning why and how the 1% got where they are. Therefore, numerous efforts have been and are being made to discredit if not suppress Post-Keynesian and heterodox economics. These efforts have had some success; this book is a response to them.

This book makes it clear that Post Keynesian/heterodox economics is, in spite of internal problems, a viable and important approach to economics and that it should resist the attempts of the critics to bury it. The reader will also find arguments that directly engage the critics and suggest that their views/criticisms are vacuous and wrong. As such, this will appeal to all who are interested in economic theory, economic history and who believe in challenging the orthodoxy.

The paper by Marc that started the book project is available here. Fred's paper which followed is here.

Toward an Understanding of Crises Episodes in Latin America

Conventional wisdom about the business cycle in Latin America assumes that monetary shocks cause deviations from the optimal path, and that the triggering factor in the cycle is excess credit and liquidity. Further, in this view the origin of the contraction is ultimately related to the excesses during the expansion. For that reason, it follows that avoiding the worst conditions during the bust entails applying restrictive economic policies during the expansion, including restrictive fiscal and monetary policies. In this paper we develop an alternative approach that suggests that fiscal restraint may not have a significant impact in reducing the risks of a crisis, and that excessive fiscal conservatism might actually exacerbate problems. In the case of Central America, the efforts to reduce fiscal imbalances, in conjunction with the persistent current account deficits, implied that financial inflows, with remittances being particularly important in some cases, allowed for an expansion of a private spending boom that proved unsustainable once the Great Recession led to a sharp fall in external funds. In the case of South America, the commodity boom created conditions for growth without hitting the external constraint. Fiscal restraint in the South American context has resulted, in some cases, in lower rates of growth than what otherwise would have been possible as a result of the absence of an external constraint. Yet the lower reliance on external funds made South American countries less vulnerable to the external shock waves of the Great Recession than Central American economies.

Read the rest here.

Gravitation, Full Cost Pricing and Prices of Production

Franklin Serrano (Guest blogger)

Most Sraffians understand that gravitation of market prices to normal prices is much quicker than the slower, but inevitable, adaptation of capacity to demand. But other eminent Sraffians have made some confusion by wrongly identifying classical prices of production with full cost pricing.

Classical prices of production are the centre of gravitation for market prices and are determined by the costs of the dominant techniques (at the level of normal utilization of fixed capital) and the state of distribution. It is a general theory of the structural determinants and limits for the trend of market prices in all types of markets. In spite of the similar name it has little or nothing to do with “normal cost” or full cost pricing which is a generalization of the descriptions given by some firms as to how they actually calculate their own prices based on a markup over their own costs (not those of the dominant technique).

First of all, there is obvious fact that the theory of prices of production was developed in a historical period in which such these pricing rules simply did not exist (see Hicks’ Market Theory of Money, 1989). And prices of production can still explain, in my view, the structural or trend element even in markets with highly flexible prices subject to wild short run fluctuations and rampant speculation, as in the so-called “commodity” markets (in Garegnani’s comment on Asimakopulos he explicitly mentions the importance of explaining the trend of the relative price of copper even though “at any one time copper prices are 50% or more above or below trend”)

Second, even in the so called fix price markets, were firms set the prices of their products directly, the full or "normal cost" that particular firms use to calculate their own price is the actual cost of these particular firms and the markup these particular firms think they can add to prices without trouble. These calculations generate actual market prices or (if stylized enough to have some generality short run theoretical prices) that are not unique even for a single market as the full cost prices can be different for different firms. These prices differ from prices of production because they refer to the actual costs of some firms and not the costs of the dominant technique available. For that particular product that determines a single price of production for that market.

The way prices of production may regulate the full cost prices of firms is by getting them in trouble whenever their actual costs plus their desired markups are too high relative to the costs (including normal profits) of the dominant technique, thereby attracting new entrants or cause some rival firms inside that market not to follow price rises that are due to increase in costs particular to that firm or “excessive” desired markups of these firms.

Professors Fred Lee and Marc Lavoie are both absolutely right and some Sraffians wrong in saying that full cost pricing is NOT the same thing as the classical theory of prices of production. Where I think they are definitely wrong is in thinking that classical prices of production are thus irrelevant for market forms in which firms follow such rules. For, through the power of actual or potential competition, the classical prices of production are the centers of gravitation that regulate even the trend of the prices of firms that practice full cost pricing. The closest analogy between classical prices of production and the industrial organization literature is thus the concept that Sylos-Labini called “limit” prices.

So market prices in both fix and flex price markets gravitate, towards or around classical prices of production. Any theory of full cost pricing can at best be a particular theory of short run price behavior of some firms in particular types of markets. There are old papers by James Clifton that started this confusion many years ago in Contributions to Political Economy and the Cambridge Journal of Economics. It is about time we stop confusing ourselves and our post Keynesian friends on this issue.

References:

Lavoie, M. (2003), “Kaleckian Effective Demand and Sraffian Normal Prices: Towards a reconciliation,” Review of Political Economy, 15(1) available here.

Lee, F. and T-H. Jo (2011) “Social Surplus Approach and Heterodox Economics,” Journal of Economic Issues, 45(4) available here.

Garegnani, P. (1988), “Actual and Normal Magnitudes: A Comment on Asimakopulos,” Political Economy, republished in Essays on Piero Sraffa: Critical Perspectives on the Revival of Classical Theory, Routledge, 1990.

Sraffian economics vs. Post Keynesian methodology

A very nice debate on the nature of heterodox economics took place yesterday in a heterodox conference in Buenos Aires. Sergio Cesaratto and Marc Lavoie (depicted above during the interval) presented alternative views which, in spite of some important differences, agreed that Sraffian economics is part of the broadly defined heterodox Keynesian camp (or Post Keynesian if one prefers the term). The question of the relation of Sraffians, and more broadly all of those that believe in the importance of the old classical political economy school (from Petty to Marx, including Quesnay, Smith and Ricardo), with non neoclassical Keynesians, that is, those that believe that unemployment does not result from some rigidity or imperfection (be that of the price, wage or interest rate), has been difficult to say the least.

Marc presented first. A version of the paper is here. Taking aside obvious confusions, and sloppy scholarship of the type that suggests that Sraffians accept Say’s Law, because in the determination of normal prices quantities are taken as given (the fact that those quantities are determined by demand in accumulation theory is, apparently, not understood by these critics), the main line of critique of Sraffians comes from what Marc refers to as Post Keynesian methodologists. For him, “the influence of methodologists ... felt through the study group around Tony Lawson at Cambridge ... that [argues that] proper economics should be based on critical or transcendental realism and ‘open’ systems” and that has led to an “‘open systems’ criterion to judge whether a model can be given a post-Keynesian stamp of approval” (Lavoie, pp. 6-7).

Marc correctly dismisses this supposition that from a methodological point of view the Sraffian approach is limited to closed models. As he clearly notes the Sraffian price equations require that one distributive variable (real wages or rate of profits) are determined exogenously outside of the system by historical and institutional circumstances, which by definition makes it an open system, that is, one in which there is an exchange with its environment. Marc, in fact, suggests that the strong case for a Sraffian-Keynesian interaction is based on the fact that the determination of the rate of profit by the exogenous short term rate of interest set by the central bank provides an obvious link to Post Keynesian endogenous money literature (Pivetti and Panico’s work in that area, among others, shows that Sraffians do have a lot to say about money too, by the way).

Marc notes that the main reason, however, why Post Keynesians reject the Sraffian approach is there is “little enthusiasm for any notion of long-period ‘prices of production’ as centers of gravity towards which short-period or market prices are supposed to tend” (p. 14). However, as Marc suggests there is little difference between prices of production and full cost pricing. Full cost pricing, in my view, should be connected to the Oxford Economists Research Group (particularly P.W.S. Andrews, a tradition that through Andrews’s disciple Wynne Godley influenced Cambridge Keynesians). In other words, I see full cost pricing as compatible with the normal prices in Sraffa, both being determined by a mark up, which represents the social conflicts that allow one class to subtract surplus from another, over costs, which are determined by the technical conditions of production.

My main disagreement with Marc’s exposition, then, is related to his argument that “if one wishes to connect Sraffian economics with the other strands of post-Keynesian economics, one needs to examine production prices in a different light, not as long-run or long-period centers of gravity to which market prices tend” (p. 15). This is also complicated by the incorrect notion that gravitation requires the use of marginalist principles in order to obtain that market prices converge to normal long term prices, which is not the case [I’ll leave the details of that for another post though]. It seems to me that Marc believes somehow that full cost prices are somehow not fully adjusted prices, and that firms do not use their normal costs rather than their short run costs when computing prices.

Sergio counter presentation (not available, but you can check some of his extensive publications here), was narrower in scope, and dealt with the difference between certain Post Keynesian growth models (in particular the so-called Neo Kaleckian school) and Sraffians (he also distinguished among certain Sraffian groups). I should note that Cesaratto agreed with Marc in his rejection of the critique of the so-called Post Keynesian methodologists, and suggested that their lack of understanding of the capital debates and its consequences, reduces the significance of their views. He correctly points out that the capital debates produced the only occasion that forced neoclassical economics to openly recognize its flaws, and, I would add, led to a significant change in the way they do economics, forcing the change in the notion of equilibrium and the development of disaggregated intertemporal short term models (i.e. without a uniform rate of profit, something first noted by Piero Garegnani).

Sergio notes that when dealing with models of accumulation there are three features that most heterodox groups would want to incorporate in their models, namely: (A) the Classical (or in general exogenously given) income distribution, (B) the Keynesian Hypothesis of an investment rate independent from an exogenously given rate of savings, and (C) normal accumulation paths, with the traditional corollary of a long run normal degree of capacity utilisation. Between these three features one obtains what Sergio refers to as the Magical Accumulation triangle.

Neo Kaleckian (NK) models (some of Marc’s models, particularly in his Foundations of Post Keynesian Economic Analysis are of this type, but not the ones in his book with Wynne Godley) tend to assume A and B, but not C. The absence of the notion of normal (or fully adjusted) positions, as we saw above with regards to prices, is the main difference between the NKs and what Sergio calls the supermultiplier Sraffians (which have A, B and C). The supermultiplier models (which are in a sense Kaldorian, on Kaldor and Sraffa see this paper) implies that long term capacity output (not optimal in the sense of full employment) is determined by the exogenous components of demand, and investment is derived demand (as noted by Sergio the key contribution here is Franklin Serrano’s PhD thesis).

Here it is important to note why long term normal positions are important. It has little to do with a belief that economic systems are stable and tend to optimal levels, since the normal positions are tendencies, and are, generally, below full capacity, and crisis are the norm. Normal positions are important because they show that the regular functioning of capitalist economies does not produce efficient allocation of resources. Without suggesting that those that deny the relevance of long term positions are imperfectionists in the same sense that neoclassical authors that believe that an accumulation path below full employment is due to price, wage or interest rate rigidities, the argument still relies on an inability of capacity to adjust fully to the exogenous growth of the autonomous components of demand. The question then is why would a business not invest enough to keep its capacity growing in line with the growth of its demand? Here, I believe, lies the fundamental difference between classical-Keynesians (or supermultiplier Sraffians) and Neo Kaleckians.

By the way, as I noted before in the blog, the use of the term Kaleckians for the NKs is a bit of a misnomer, since the models derive really from Joan Robinson (and as noted by Sergio, Harrod and Steindl too). In part, I think, for her role in the rejection of normal positions and her views on history versus equilibrium, Sergio suggested that Robinson played a negative role in these debates.

There are several other things to discuss about this topic (the role of Joan Robinson among the important ones), brought about by the interesting, controversial, but very friendly debate between Marc Lavoie and Sergio Cesaratto which I’ll leave for other posts.

MMT and its discontents

The Washington Post had a substantial profile on what is now termed Modern Monetary Theory (starts with Jamie Galbraith, and then goes on to the Kansas version of post Keynesian economics). A few reactions in the blogosphere. Two worth noticing are by Dean Baker and Jared Bernstein that provide qualified support.

Dean suggests that beyond fiscal deficits stimulus should also come from monetary policy (lower interest rate), and a more depreciated dollar. My guess is that, at least the Kansas MMTers would be fine with both, but suggest that lower rates of interest are not much in play now. But from what I understand a depreciated dollar has been seen as part of a solution by most progressive economists. Randy Wray, for example, is certainly less concerned with the size of a trade deficit than Dean, since the US is the issuer of the key currency [I have less confidence on flexible exchange rates as a way of solving balance of payments constraints in developing countries, but I'll leave that for another post].

My concern with Dean's notion of a more devalued dollar, which is generally fine and will not lead to the demise of the dollar in the near future, is that for the workers with low wages that depend on cheap imports at Walmart it implies higher prices and lower real wages. A boost to increase real wages would be necessary [see Jamie on that here]. So better income distribution should be the most important channel to boost consumption on a sustainable way.

Jared Bernstein fundamentally adds that taxes on the wealthy should be increased. Which he argues from a political standpoint, and I think it is quite reasonable, since that is one way (besides hiking minimum wages, and repealing right to work and other anti-labor legislation) to improve income distribution.

On a more personal level, my problem with the WaPo piece, and the general discussion of MMT, is that for the most part it sees MMT as just a policy program (the Kansas one is, for example, an Employer of Last Resort of some type, which is fine with me, by the way), and does not separate the theoretical discussions from the policy stuff.

Endogenous money, chartalism, and functional finance, are relevant because they fit the theoretical framework of a coherent heterodox alternative to the mainstream based on Keynes' Principle of Effective Demand [for a full alternative you need also long term pricing; in Kansas your man for that would be Fred Lee]. For my views on that go here. I think, hence, that a coherent alternative to the mainstream, beyond Keynesian economics, requires a good dose of the old and forgotten methods of classical political economy.

PS: My point about theoretical versus policy matters is driven by the fact that on certain policy issues, like the need for further fiscal stimulus, New Keynesians like Krugman and DeLong would be fundamentally in agreement with MMTers.

Keynes's General Theory: Seventy-Five Years Later

This volume, a collection of essays by internationally known experts in the area of the history of economic thought and of the economics of Keynes and macroeconomics in particular, is designed to celebrate the 75th anniversary of the publication of The General Theory.

The essays contained in this volume are divided into four sections. The first section contains three essays that explore the concept of fundamental uncertainty and its unique role in The General Theory. The second section contains five essays that examine the place of The General Theory in the history of macroeconomics since 1936. The third section contains three essays that explore the interrelationships among Keynes, Friedman, Kaldor, Marx and Sraffa and their approaches to macroeconomic theory and policy. The final section contains four essays that provide several new interpretations of The General Theory and its position within macroeconomics.

Keynes's General Theory is intended for those students and scholars who are interested in the economics of Keynes and the rich variety of approaches to macroeconomic theory and policy.

The Euro Imbalances and Financial Deregulation

New paper at the Levy Economics Institute. From the abstract:

Conventional wisdom suggests that the European debt crisis, which has thus far led to severe adjustment programs crafted by the European Union and the International Monetary Fund in both Greece and Ireland, was caused by fiscal profligacy on the part of peripheral, or noncore, countries in combination with a welfare state model, and that the role of the common currency—the euro—was at best minimal.This paper aims to show that, contrary to conventional wisdom, the crisis in Europe is the result of an imbalance between core and noncore countries that is inherent in the euro economic model. Underpinned by a process of monetary unification and financial deregulation, core eurozone countries pursued export-led growth policies—or, more specifically, “beggar thy neighbor” policies—at the expense of mounting disequilibria and debt accumulation in the periphery. This imbalance became unsustainable, and this unsustainability was a causal factor in the global financial crisis of 2007–08. The paper also maintains that the eurozone could avoid cumulative imbalances by adopting John Maynard Keynes’s notion of the generalized banking principle (a fundamental principle of his clearing union proposal) as a central element of its monetary integration arrangement.

Read the rest here.

Paul Davidson on Obama's job speech

Here is a link to an interview with Paul Davidson. He makes it clear why a payroll tax cut and other incentives to hiring will not be enough to create new jobs. Lower costs will not lead to hiring if there is no demand. It's not just basic economics, it's simple logic.