Lance Taylor (1940-2022) and his legacy

With Lance in Beijing (2001)

I took Lance’s macro class in the Fall of 1995 at the New School for Social Research (NSSR), and then was his Teaching Assistant for two years. The book we formally used was Income Distribution, Inflation and Growth: Lectures on Structuralist Macroeconomic Theory, in which the terms (not the concepts) for wage-led and profit-led economies were first used (at least that's what I think; profit-led does not appear in the index, I must note). But classes were based on his notes, on what became his next book Reconstructing Macroeconomics (he thanked me for all the input in my copy; I had to learn how to read his handwriting, which was not easy). In many ways, my thinking was influenced more by the Sraffian professors at the NSSR, both John Eatwell (I was also his TA in the micro class) and Ed Nell (who really was the first to discuss functional finance in my classes), in part because the blend of Cambridge left-of-center Keynesianism and Latin American Structuralism, that Lance exposed, was more familiar to me coming from Brazil.

My plan was to work on inflation theory (and I did write a conflict model, that can be seen as being in Lance’s tradition later on; in my view his best book is the one that is less formal, and is on inflation, his Marshall Lecture at Cambridge, Varieties of Stabilization Experience; at the time I first read it I didn't know that the title was a quote from Henry James; the other candidate is his book with Eatwell Global Finance at Risk. Both are more books than manuals). But I started working with Wynne Godley on his stock-flow model for the joint Center for Economic and Policy Analysis (CEPA) and Levy Economic Institute project. A year into the project I told Lance that it would make sense if I worked on something related to the project, namely the sustainability of the US external account. Lance was very nice about it, and not only went along, but also provided funding, since I received CEPA’s dissertation grant.

I ended up writing something that was very close to Massimo Pivetti’s monetary theory of distribution. The theory at least. Lance provided comments and feedback, and, at some point, told me that I was obsessed with this monetary distribution thing (I was, indeed). But he also provided support, and his criticism was always constructive. Lance was the best supervisor one could have. He guided the work with frequent conversations, read and criticized what I gave him to read, and, after it passed certain standards, approved it, even if it wasn't exactly a Lance Taylor dissertation. He never tried to mold my thinking, or force me to work on own his terms. Sadly, that isn’t the norm in academia. I think he had been lucky with his supervisor too. He once spoke fondly of Hollis Chenery (his supervisor; not his mentor, which I think was Rosenstein-Rodan; I might be wrong), because he protected the radicals, which were under pressure in the late 1960s at Harvard. His intellectual generosity, among several other qualities, is something that will be deeply missed.

Lance was open to alternative methods, and approaches, what he called closures (certainly more than I am), and his comparative method was influenced by other disciplines, the qualitative "thick descriptions" a la Clifford Geertz that he liked. I actually ended up reading a bit of Geertz because of my conversations with Lance, particularly when I was the assistant director at CEPA (he was the director) and he organized a book on several comparative studies of liberalization in peripheral countries (the one on Brazil, which was supposed to appear in a previous volume, and should have been written by Edward Amadeo, was eventually written by me; photo above is from one of the conferences that led to that book). Geertz saw anthropology, as he famously put it, "not [as] an experimental science in search of law but an interpretive one in search of meaning." The thick description was essentially the interpretive work of the ethnographer. Lance took that view, in some sense, of economics, blending the description of the historical and institutional features of peripheral countries, with relatively simple models in what Paul Krugman (a co-author; Paul's first paper was the one on contractionary depreciations with Lance) called the MIT or Solow type models (my only other model in that sense, is the currency crisis one that puts Krugman's one upside down).

 

I tend to think that this methodological stance is Lance most enduring legacy, and the one that had the most influence on my own work. Most discussions of his work emphasize the gap models (which I think are problematic, the savings and fiscal gaps in particular), or the stagnationist model of growth, which builds on Bob Rowthorn's seminal Neo-Kaleckian growth model (and also on Amitava Dutt's model, which I think was part of his dissertation work under Lance). Some might even think that it was the reversal of his views on the role of exchange rates in development, his paper with Roberto Frenkel on stable and depreciated exchange rates as engines of growth (which can be seen in line with Luiz Carlos Bresser-Pereira and Jaime Ros views, and as being at the center of New Developmentalism). Others might think it's his work on Social Accounting Matrices that prefigured, and went hand in hand with his appreciation for Wynne Godley's stock-flow consistent models (on Wynne's methodological stance, see this old post).

In a way, all these models, and others (I could have added the Minsky crisis one, that is often neglected), to some extent show the use of models for Lance. He was somewhat eclectic, and use them to illustrate some of the issues with developing countries. But for him that had to be complemented by the interpretive thick descriptions. In my view, the models per se were less relevant for Lance, who was an unorthodox lefty that remained so, as someone remembered recently, even as the whole world moved to the right in the 1980s, and 1990s (he told me that a director of research at the World Bank, that had become a neoliberal, told him in his last visit to that institution, if he wasn't ashamed for still defending those structuralist views). And he did leave MIT for the NSSR, which was a strong signal of his political views. The simple model allowed him to tell the stories.

I have a tendency to prefer greater consistency in the models, and I'm less keen on accepting some possibilities of neoclassical/monetarists closures for the real world. But his methodology, which in some sense contrasts with the large stock-flow models that my other mentor (Wynne) liked, is certainly something I think it is a more fruitful way of thinking about macroeconomic problems. But again the specific models per se are less relevant, and the thick description that they illustrate with simplicity matter more.

Do current times vindicate Keynes and is New Keynesian macroeconomics Keynesian?

Thomas I. Palley, Esteban Pérez Caldentey and Matías Vernengo

Professor Robert Rowthorn delivered the second annual Godley–Tobin lecture in New York City on 1 March 2019. The title of his lecture was ‘Keynesian economics – back from the dead?’ and it is published in this issue of the Review of Keynesian Economics. The lecture was attended by a large audience and the Question & Answer session provoked a stimulating discussion. Prompted by that discussion, we thought it would be interesting to invite some leading economists to independently address Professor Rowthorn's lecture topic. This symposium is the outcome of that invitation.

We are living in a time which many believe has a distinctly Keynesian character. That is captured in the belief that many economies appear to suffer from aggregate demand shortage or, at least, a proclivity to demand shortage. It is also captured in the revival of the concept of ‘economic stagnation,’ which was an idea that had much traction in the 1930s and 1940s but then fell away in the 1950s with the post-war boom and the non-reappearance of depression-like conditions.

Another Keynesian feature of the times is the character of macroeconomic policy, particularly fiscal policy. Following the financial crisis of 2008 and the Great Recession it spawned, there was a global turn to sizeable coordinated fiscal stimulus. Though that turn was truncated (Keynesians would say mistakenly), its legacy remains in place in the sense that discretionary counter-cyclical fiscal policy is back. That is evident in the renewed widespread belief among economists and policymakers regarding the value of fiscal stimulus to combat recessions, though the details of when, how, and how much are still contested. That contrasts with the situation before the Great Recession when the mainstream consensus was that discretionary counter-cyclical fiscal policy was largely ineffective.

Read rest here

From the last issue of ROKE with free papers by Rowthorn and Eichengreen.

Keynesian Economics: Back from the Dead

The Godley-Tobin Lecture by Bob Rowthorn, to be published by the Review of Keynesian Economics.

Rowthorn suggests that many Keynesian features are part of the mainstream now, in particular showing a stable Phillips Curve without a natural rate. I remain more skeptical about the return of Keynesianism within the mainstream, but worth listening to his thoughts.

The Godley-Tobin Lecture

Tobin and Godley

The Review of Keynesian Economics (ROKE) created of the Godley-Tobin Lectures, an annual lecture to be delivered at the Eastern Economic Association meetings. James Galbraith provided the first lecture, to be published in the first issue of 2019.

Wynne Godley and James Tobin represent the best among Keynesian economists. Both scholars insisted they were non-hyphenated Keynesians, meaning Keynesianism transcends the political disputes that often accompany economics. There is a deeper scientific validity to Keynesianism, something we reaffirmed in our inaugural statement of purpose for ROKE [see Palley, Rochon, and Vernengo, 2012].

Wynne Godley was an Oxford-trained economist, influenced by Philip Andrews and the views of the Oxford Economic Research Group on full-cost pricing. He was also a Treasury economist and Head of the Department of Applied Economics, University of Cambridge. He is remembered for the sophistication of his stock-flow consistent macroeconomic models that gave him a prescient sense of the unsustainability of the dot.com and housing bubbles in the 1990s and 2000s. Godley died in May, 2010.

James Tobin was educated at Harvard University and spent most of his career at Yale University. He was also a member of the celebrated Council of Economic Advisers (1961-62), during the Kennedy administration. His accomplishments and contributions to the profession are too many to cite, but it is specifically worth mentioning that he won both the John Bates Clark Medal (1955) and the Nobel Memorial Prize in Economic Sciences (1981). Tobin died in March, 2002.

Tobin and Godley shared an interest in stock–flow consistent macroeconomic modelling, a belief in the appropriateness of macroeconomic modelling based on aggregate functions rather than microeconomic parable models, and a belief in the importance and feasibility of full employment.

The Godley-Tobin lectures are intended to celebrate the intellectual achievements of Wynne Godley and James Tobin. We also hope the lectures will contribute to advancing their macroeconomic approach and interests, and help rescue macroeconomics from the narrow theoretical frame within which it is currently trapped.

The editors of ROKE [Tom Palley and yours truly] are pleased to announce that Robert Rowthorn has accepted to give the second annual Godley-Tobin lecture at the 2019 meetings of the Eastern Economic Association, in New York City. Professor Rowthorn is Emeritus Professor of Economics at Cambridge University and a life Fellow of King’s College.

He was also a long-time colleague of Wynne Godley at Cambridge University.

Kaldorian and Sraffian supermultipliers: a clarification

This is a post for those interested in demand-led theories of growth. Not long ago I wrote a post on misconceptions about Sraffian economics. Marc Lavoie sent me a nice email about it, and a recent paper he published in Metroeconomica (subscription required), which comments on a paper I wrote with Esteban Pérez (working paper available here). In his discussion of supermultiplier models, which put the multiplier and the accelerator together to explain -- not fluctuations of the level of output around its normal position -- but the determination of trend or normal output. Lavoie says:

"Other post-Keynesians, also assume that non-capacity creating autonomous expenditures are the driving force, rather than investment. Serrano himself refers to Kaldor (1983, p. 9) to provide support for this reversal of causality. Fazzari et al. (2013) assume that there is some unidentified demand component that grows autonomously, in order to tame Harrodian instability; Godley and Lavoie (2007, ch. 11) and, as already pointed out Allain (2015), rely on autonomous government expenditures. Indeed, there is a large Kaldorian literature that relies on exogenous growth components other than business investment, most particularly the whole literature on Thirlwall 's law with its exogenous exports (McCombie and Thirlwall, 1994), as well as Godley and Cripps (1983), with both government expenditure and export sales."

And in a footonte to that passage he says:

"Thus, adding to the confusion over terminology, Pérez-Caldentey and Vernengo (2013) refer to the Kaldorian tradition when discussing models based on induced investment and non-capacity creating exogenous growth components such as Serrano's Sraffian supermultiplier analysis."

So let me clarify our use of Kaldorian, and also why I believe that it is a mistake to refer to the Sraffian supermultiplier as neo-Kaleckian, even though it does have evidently Kaleckian elements. As I understand the distinction that came to dominate demand-led models of growth, there are basically two* main traditions, one that is referred to as neo-Kaleckian, and one that is referred to as Kaldorian.

The first tradition developed from Bob Rowthorn's expansion of Joan Robinson's 1960s model. And because Joan Robinson was influenced by Kalecki, and  Rowthorn, a Marxist author, was seen as Kaleckian, the name stuck. The original model, one must note was wage-led. And causality basically determined whether the authors was Keynesian or Marxist, with Ed Nell famously referring to one author that suggested that causality went from income distribution to growth as Jean Baptiste Marglin. At any rate, Marxist and Keynesian closures, to use the term popularized in this context by Lance Taylor, were special cases of the neo-Kaleckian model. Later developments introduced changes in the independent investment function which allowed for a profit-led closure.

As I noted before, the term Kaleckian is a bit of a misnomer. The current version of the model allows for a profit-led closure, which is not clearly in Kalecki, and, besides its derived from Joan Robinson's model. The Kaleckian feature is that often it is assumed that workers do not save, and capitalists do not consume, for simplification, a classical political economy type of assumption really.**

The genesis of supermultiplier models is more convoluted. On the one hand, the combination of multiplier and accelerator was used to discuss economic cycles, not growth, including by Hicks, who first discussed the idea of the supermultiplier. By the late 1960s, Kaldor moved away from the differential savings or neo-Keynesian growth models (sometimes referred to as Kaldor-Pasinetti or Cambridge growth model), and adopted the supermultiplier model, formalized by Thirlwall in the 1970s. The model assumed as a simplification that exports were the only autonomous component of demand. In accordance with the accelerator, investment was seen as derived demand. That is the main difference with the so-called Neo-Kaleckian models, namely: there is no independent investment function.***

The idea of the supermultiplier was later, in the 1980s and 1990s, developed by Bortis and Serrano,**** both authors sharing a Sraffian perspective. In these versions, autonomous spending was not restricted to exports, and government spending was also relevant. The term Sraffian or classical-Keynesian has been used to describe these models. In essence, they are Kaldorian models, since investment is derived demand, as much as in Thirlwall's model. In this sense, even though the Kaldorian models a la Thirlwall are a special case of the Sraffian supermultiplier, as discussed here in my debate with Jaime Ros (in Spanish), and by definition more general than the export-led growth model, they came later, and can be seen as a development within this tradition.

So certainly the intention is not to create confusion. In my view, models with an independent investment function are broadly speaking neo-Kaleckian, while models in which investment is derived demand are Kaldorian. And there are differences between models within those broadly defined traditions.

* All taxonomies are somewhat arbitrary and one might see some sub-divisions from the two main branches discussed here as standing in the same footing, for example, some might argue for an explicitly Marxist tradition.

** Goodwin predator-prey models, which have become quite fashionable, can be seen as a variation of these neo-Kaleckian models.

*** I think these Cambridge models have been completely abandoned since the 1960s, and that is the reason why I don't have three types of models in my taxonomy. They are a historical curiosity, associated to a response to the Harrod instability problem, at a time when full employment seemed like a stylized fact in advanced capitalist economies. For a clear explanation of the implications of the different model closures see the paper by Franklin Serrano and Fabio Freitas here.

**** The Sraffian versions of the supermultiplier model also assume differential savings by workers and capitalists, as many other classical political economy inspired models, and in that sense have Kaleckain features. But they are not neo-Kaleckian, since there is no independent investment function.

Sraffa and Marxism or the Labor Theory of Value, what is it good for?

An old, but not completely closed, debate revolves around whether Sraffa was a Marxist or instead he should be seen as Ricardian, hence the term Neo-Ricardian used derisively by Bob Rowthorn (subscription required) and other Marxists authors (and also by Frank Hahn, again subscription required). From a personal point of view there is little doubt that Sraffa identified with Marxism, and close friends like Antonio Gramsci and Maurice Dobb would agree. But the important question is whether his contributions in Production of Commodities by Means of Commodities (PCMC) should be seen as a development or a criticism of Marx's theoretical tradition.

For the most part the question revolves around the relation between Sraffa's prices and the labor theory of value. Several authors tend to believe that the latter theory is central for Marx's theory of exploitation. Recent interpretations such as the so-called New Interpretation (NI) and the Temporal Single System (TSS) would agree on that point.

For example, Foley and Duménil (2008; subscription required) argue that:

"Central to Marx's framework of analysis in Capital is the labour theory of value (LTV), which defines the value of a commodity as the ‘socially necessary’ labour time required by its production, that is, the labour time required by average available techniques of production for workers of average skill. 

The LTV is central to Marx's theory of exploitation, a term he uses to describe a situation in which one individual or group lives on the product of the labour of others."

On the similar claims by the TSS Marxism see Mongiovi (2002; subscription required). [Vienneau provides a list of readings on the TSS topic here.]

The question then is what was the role of the labor theory of value in Marx and the classical authors, i.e. for the surplus approach. The initial problem that Smith was trying to deal with the LTV was to determine the rate of profits independently of prices, since profits were considered essential for capital accumulation. Note that one needs the prices to determine profits, in particular the price of the means of production advanced for production, but one needs the rate of profit (the normal uniform rate of profit) to determine long term normal (or production) prices.

Smith (1776, book I, chapter 6) makes the value of commodities depend on the quantity of labor required to produce them is where there has been no accumulation of capital or land. In his words:

"In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another."

But when profit and rent make their appearance alongside the worker's income, the rule is no longer applicable. The price of a commodity is then obtained by 'adding up' its component parts, namely: wage, profit and rent. The adding up theory implied that profits and wages had an independent determination. Hence, if profits went up, and prices too, real wages might not decrease. As a result, one cannot determine profits independently of prices.

Ricardo saw the limitations of the adding up theory. In his early writings he solved the problem by presuming that the economy produced corn (grain) with corn and labor, and the surplus was a physical amount of corn, so the rate of profit could be measured as ratio of corn (the surplus) to corn (the means of production advanced for production). He, then used, the labor theory of value as an approximation to the solution in his Principles, knowing that prices were not exactly proportional to the amounts of labor directly and indirectly used in production.

That was, also, essentially the role of the LTV in Marx's volume I of his masterpiece Capital. That is, the LTV allows Marx to determine the rate of profit independently of prices. Note that Marx was also aware that relative prices determined by the amounts of labor directly and indirectly incorporated are incorrect once you have produced means of production. However, Marx thought that embodied labor redistributed by the process of competition meant that in the aggregate total surplus value  corresponded to total profits, even if prices of production deviated from embodied labor. As a result, on the basis of the LTV it was still possible to obtain the correct rate of profit. As it turns out, there is no reason for positive and negative deviations of prices of production from the labor values to cancel out. You cannot argue with the algebra.

Marx had no way of knowing this. Only with Bortkiewicz, Dimitriev and Tugan-Baranovsky's work, early in the 20th century, this was clearly understood. If in general commodities do not exchange at labor values, then there is no reason why that should be correct for two composite commodities that make the total physical surplus and the physical advanced means of production.

Sraffa's solution, based on the standard commodity (to be discussed in another post), shares with Ricardo's corn model the idea that one can measure the rate of profit as a share of a particular commodity (Sraffa's being a composite commodity, that is, composed of several goods). It also shares with Ricardo the fact that only basics (commodities that enter the production of all goods including their own production), which for simplicity can be related to subsistence goods, affect the rate of profit, while non-basics, or luxury goods, are not relevant. Further, as noted by Sraffa too, his solution resembles Smith's since the standard commodity can be seen as akin to the former's idea of labor commanded, that is relative prices are proportional to the amount of labor that they can command (buy). In that sense, Sraffa's prices are firmly based on a certain notion of the labor theory of value.

Mind you, in the central issues Marx's theory was correct. Once you determined exogenously the real wage, and the technical coefficients of production are given, one can determine the rate of profit, and it is inversely related, everything else constant, with the real wage. Hence, the theory of distribution based on class conflict which is the central element of the surplus approach, including Marx, is logically consistent [which is more that can be said about marginalism, as showed by the capital debates].

But does the Sraffian system mean that exploitation as interpreted by Marx is not valid anymore, since, as noted above, some Marxist authors think that the LTV (narrowly interpreted as prices of production proportional to embodied labor) is essential for that part of the Marxian project? Petri (2012)* has published an excellent review of the limitations of the NI and TSS. He clearly states (p. 3) that:

"The proof that labour is exploited, in particular, does not lie in the validity of a quantitative correspondence of surplus exchange value with surplus labour time; this is a misconception that derives from a mistaken acceptance of the argument that the inability to prove such a correspondence might mean that the capitalists contribute to production, that profits reflect their contribution, and that this is the reason why commodities do not exchange in proportion to labours embodied – the argument of the ‘vulgar’ economists and then of the marginalist critics of Marx" (emphasis added).

Why is that the case that there is no correspondence between the LTV and whether labor is exploited or not? Note that for Marxists this is a necessary condition because workers work more time than what is needed for their reproduction, and that is the supposed basis for exploitation. It is worth quoting Petri at length here:

"Imagine an isolated market economy where production is carried out by self-employed artisans and cooperatives, and the rate of profit is zero: prices of production are proportional to labours embodied. One day Gengis Khan’s army invades this community, but instead of killing everybody Gengis Khan announces that he will be content with collecting a yearly monetary tax at a rate r=20% on the value of the capital employed in each productive activity, a tax he will then use to buy goods on the market. The community is obliged to accept, and prices of production come to include a 20% tax on the value of capital which has the same effect on relative prices, and on real wages, as a 20% rate of profit. Relative prices are no longer proportional to labours embodied, Marx’s r=S/(C+V) does not work, but production is still performed by the same labourers, and the goods appropriated each year by Gengis Khan with the income deriving from the tax do not reflect any productive contribution of the oppressors. One would have little hesitation, it would seem, to say that Gengis Khan is exploiting this community. But if Gengis Khan had imposed the tax as a given percentage of wages, with the rate of profit remaining zero, then relative prices would have remained proportional to labours embodied, but exploitation would be still there. On the other hand, imagine that the 20% tax rate on the value of capital is imposed not by Gengis Khan but by unanimous popular vote because it is decided to use it to help for some years another community struck by an earthquake: in this case the surplus product would again be associated with an impossibility to explain prices with the labour theory of value, but few would call the surplus product the fruit of labour exploitation. All this shows that the proportionality or non-proportionality between exchange values and labours embodied reflects, not the absence or presence of other productive contributions besides that of labour, but only the specific way the mode of appropriation of the surplus product affects relative prices; the origin of the surplus remains to be ascertained" (emphasis added).

Hence, as the simple example shows one might have exploitation without the LTV, and no exploitation with the LTV, which should be a black swan for those that think that Marxism stands or falls with the narrow definition of the LTV. For our purposes what matters is that the correct solution of the problem of the determination of the rate of profit independently of prices, provided by Sraffa, actually strengthens and is a development of the theories of Marx and the other authors of the surplus approach. Sraffa is the author that makes Marx's conclusions possible.**

Notes:

* Petri provides a critique of NI and TSS solutions of the transformation problem too. A different solution, that is more Ricardian in assuming that embodied labor provides a good empirical approximation to production prices, is provided by Shaikh (1977).

** Interestingly Petri quotes several passages in which Foley tends to suggest that Marxism and marginalism are not necessarily incompatible.

References:

Foley, Duncan and Gérard Duménil (2008). "Marxian transformation problem." The New Palgrave Dictionary of Economics. Second Edition. Steven N. Durlauf and Lawrence E. Blume. (eds.), The New Palgrave Dictionary of Economics. Palgrave Macmillan.

Mongiovi, Gary (2002). "Vulgar Economy in Marxian Garb: A Critique of Temporal Single-System Marxism," Review of Radical Political Economics, 34(4), pp. 393-416.

Petri, Fabio (2012). "On Recent Reformulations of the Labour Theory of Value," Quaderni del Dipartamento di Economia Politica e Statistica, Università degli Studi di Siena, No. 643.

Shaikh, Anwar (1977). "Marx's Theory of Value and the Transformation Problem,"in Jesse Schwartz (ed.), The Subtle Anatomy of Capitalism. Goodyear Publ. Co.