What is heterodox economics?

New working paper published by the Centro di Ricerche e Documentazione Piero Sraffa. From the abstract:

 This paper critically analyzes Geoffrey Hodgson’s definition of heterodox economics as the refutation of the orthodox view that emphasizes utility maximization as its main theoretical core, and his view that it is the fragmentation of heterodox economics that explains its subsidiary role within the profession. Hodgson’s views led to a series of responses, that criticize his definition, but also present significant problems of their own. The limitations of Hodgson and his critics’ views are contrasted with an alternative definition that emphasizes the importance of conflictive distribution and the principle of effective demand in the long run. The idea of a broad tent, from a sociological point of view, does not preclude the need for a clear analytical definition of heterodoxy. The broad tent should be seen as part of a strategy of survival.

Link here.

Why do we need a theory of value?

The theory of value and distribution is at the heart of economics. To be clear, when I say that it is at the center, it means that discussions of almost any topic in economics, in one way or another, depend on a certain theoretical position about the theory of value and distribution. However, most economists have no clue about it, about the centrality of value. Not only they don't understand the original and now infamous labor theory of value (LTV), that dominated between Petty and Ricardo (and Adam Smith too, even though that tends to surprise and puzzle most economists),* but also they misunderstand the dominant marginalist paradigm. Some economists actually think that you don't need a theory of value at all, and some don't even understand that they use a conventional (some vulgar form of supply and demand) theory of value. Hence, the reason of this post is to try to help clarify some very basic issues related to the necessity of a theory of value for proper theorizing in economics.

In a sense, this topic was discussed here before, in my post on Sraffa, Marx and the LTV. But it is worth revisiting, and thinking in broader terms, beyond the LTV, to understand why a theory of relative prices is needed in general, to understand almost everything in economics.

Let me start with the authors of the surplus approach. In fact, a bit earlier with the economists that would eventually be known as Mercantilists (if you can talk about a school). If we are allowed to generalize and simplify, the latter believed that the wealth of nations depended essentially on maintaining trade surpluses, and accumulating precious metals. Profits were essentially the result of buying cheap and selling dear, or profits upon alienation, which indicates that, for Mercantilists, profits were generated in the exchange process.

Classical political economy authors, starting with William Petty, emphasize the determination of profits in the process of production, as a residual of output, once the conditions for the reproduction of the productive system were satisfied. So profits are not the result of selling high and buying low, something that could result from the mere fluctuation of market prices, but from the ability to produce beyond what was needed for the simple material reproduction of society. Note that to obtain profits, part of the residual, the surplus over and beyond reproduction requirements, one needs to know the prices of the means of production. That is, one needs to be able to account for the normal prices of the goods that went into the production of all commodities. And these prices would include a normal profit. Again, not the extra gain that might occur from a high market price. So the normal rate of profit is needed to determine prices, and prices are needed to determine the normal rate of profit. This was well understood by both Ricardo and Marx.

Value (the relative prices of commodities) and distribution (the normal rate of profit) are intertwined. Smith knew that the simple LTV (amounts of labor incorporated) was not correct other than in very rudimentary economic systems, with essentially no produced means of production. His solution was to adopt the idea of labor commanded (more on that on my post on Sraffa, and the one on the standard commodity). Ricardo solved this problem, in his corn essay, by assuming that the surplus and the means of production advanced to produce output where all in physical quantities of corn, hence profits could be determined independently from relative prices, as a physical quantity. And Marx adopted the simple labor theory of value in volume one of Capital. Both believed, for slightly different reasons, that their main arguments would hold even if the LTV was not precisely correct.

I am not concerned with the problems with the LVT in Ricardo and Marx (worth noticing that the mathematical solution was not known in their time, and was essentially developed in the late 19th and early 20th centuries) or Sraffa's solution. It is worth insisting that the LTV does have an analytical solution that is unique, and stable (see my post on the standard commodity for the former, which suggests a Smithian, i.e. labor commanded, version of the LTV is perfectly fine).** That's good, btw. It suggests that the classical political economy notion that there are prices that guarantee the reproduction, and, beyond the the expansion (or accumulation), of the economic system do exist.

Here I want to emphasize the importance of the LTV for the analysis of other aspects of the economy. Ricardo saw the problems of the Smithian adding up theory. That's the notion that prices were composed by the sum of natural wages, profits and rent and that prices would go up if one of its components went up.  In order to determine the rate of profit properly, Ricardo noted the explanation of value was essential. The rate of profit was central because in his view the processes of accumulation depended on the rate of profit. Hence, proper discussion of accumulation and growth depends on a proper theory of value and distribution. Btw, all classical authors assumed that real wages were exogenously determined by institutional and historical circumstances (so there was a role for history and institutions in their theory; also, for accumulation that was seen as too complex to be theorized in the same level of abstraction that value). But even if one is less keen than Ricardo on the role of profits in accumulation, it is undeniable that distribution affects accumulation, and, hence, a proper theory of value and distribution is needed.

Note also, that other things that depend on relative prices are crucially affected by the theory of value and distribution. Classical authors assumed that the process of competition, by which they meant only free entry and not the size or the number of firms in an industry, would lead to a uniform rate of profit. In that sense, the forces of competition were central in forging the structure of production, and, hence, the determination of technological change or to understand the patterns of trade specialization, which cannot be understood without the determination of relative prices. In fact, perhaps the most famous and the most controversial issues coming out of Ricardian economics dealt with international trade and the effects of technical change (the so-called machinery question), and are directly connected to the theory of value.

Even the most crucial macroeconomic problem, the question of output determination (and employment, for a given technique) is affected by the theory of value. Note that classical political economists assumed output as given for the determination of the surplus. And Ricardo accepted Say's Law as a way of determining output and employment (not Marx, btw, so it's NOT a requirement of the surplus approach). But as much as for accumulation understanding of distribution is central for the determination of the level of output, as it is explicit in the Kaleckian effective demand model. the classical long term prices are compatible with levels of output that do not guarantee full employment. And the parametric role of distribution in affecting the size of the multiplier is crucial for output and employment determination. So unemployment is possible in the long run, as a regularity of market economies.

In other words, for a coherent theory of output, accumulation, international trade, technological change and more (taxation, etc.) you need a theory of value and distribution. That is also the case in the mainstream. Marginalism developed in the last quarter of the 19th century, both as a result of the lack of analytical solution in that period for the problems of the LTV and as a reaction to radical revival of the theory (Marxism). The important distinction is that while classical political economy authors dealt only with objective factors, and considered demand as given when determined value and distribution, marginalism incorporated subjective preferences as central for the explanation of long term normal prices, and prices and quantities were determined simultaneously.

Beyond the problems with the marginalist solution for the existence of long term prices (see this on the capital debates) and their switch to the intertemporal approach, which basically only deals with short term prices, their theory is also central for almost everything in economics. In a sense, given that in marginalist analysis distribution is determined by supply and demand, and by the relative scarcity of factors of production, the theory of value and distribution is even more central for other parts of their theory than in the surplus approach. Here the theory of distribution does not affect indirectly the level of output and the process of accumulation. Here the level of employment and, for a given technology, output determination is the same as the theory of distribution. Real wages and the level of employment are determined in the labor market simultaneously. Everything derives from that.

Before getting to the reason why the theory of value and distribution, central for everything, is often ignored, let me note briefly the possibility of a third alternative to value and distribution, beyond the surplus approach and marginalism. That would be the markup theories of pricing. Note that theories of markup pricing essentially describe how firms determine prices. Most of these theories were developed as a result of the imperfect competition literature sparked by Sraffa's famous (1926) critique of Marshallian price theory (see an old post on that here).

First, as it would be known for the readers of this blog (at least the ones that have been reading for a long while), markup pricing is actually dealing with a different set of issues, and Franklin Serrano suggested here that they are different than the classical political economy normal long term prices (the Marxist prices of production or Sraffa's prices), and that Fred Lee and Marc Lavoie were right about that. He argued that some Sraffians (I won't name names), and I would add probably Fred too, thought that Sraffian prices were compatible with the full cost pricing tradition, and I could have included myself in this group.*** Note that what I mean by that is simply that the behavior of firms must be compatible in the real world with the logic of gravitation in classical analysis. In other words, if prices of production imply a normal profit over the full cost for a given technique, then firms somehow must be trying to do that.

But it is clear that the full cost pricing of a particular firm might not be the long run equilibrium price around which market prices gravitate, with free mobility, that is, with competition in the classical sense. In a way, the same circularity suggested above reapers, costs depend on prices (and that involves the profit related to the markup), and prices depend on costs. The firm's individual prices might not be the prices that are required for the reproduction of the economy as a whole. In that sense, markup theories must be grounded on some surplus approach understanding of value and distribution, and they are essentially theories about market prices, meaning short run behavior. In that sense, they run into the same problem than the intertemporal marginalist models, the Arrow-Debreu type, that became more popular after the capital debates, and that led to what Garegnani famously referred to as the change in the notion of equilibrium (that is the abandonment by the mainstream of the notion of long run equilibrium). Some heterodox groups see this as a positive development, but again it implies that they cannot say anything clear about distribution and relative prices, and that has implications for almost any other theory.

I might add here, which is more concerning for some heterodox groups, is that many of these theories are also compatible with marginalist interpretations of the theory of value and distribution. Many imperfect competition theories just suggest simple inverse relations between markups and the price elasticity of demand. This again fall into the type of situation I discussed recently regarding Karl Polanyi, of well-meaning critics of the marginalist mainstream, using marginalist or neoclassical concepts w/o knowing they are doing it (if it's conscious acceptance of the mainstream model, then it's something different).

One last thing in this regard, while markup theories must be grounded on some theory of value and distribution, and my take is that the surplus approach is where it would make sense, the opposite is not true. There is no need for a theory of the firm, of individual behavior, to understand long term prices. Classical political economists certainly discussed behavior, but that essentially entailed some notion related to class, to general social norms, not about what is going on in someone's brain. Even Smith that was certainly concerned with the issue of the role of self-interest in determining the equilibrium outcomes in the market, cannot be assumed to be a precursor of the rational maximizing agents of the mainstream, or of methodological individualism. The same could be said of utilitarian views and Ricardo, who was, to some degree, close to many utilitarians including Bentham. Here too, many heterodox economists think that an alternative theory of behavior is central for economics, and that is why many see behavioral economics as somewhat heterodox.

Finally, getting, even if briefly, to the point of why most economists remain oblivious to the relevance of value and distribution. I would suggest that this is a recent phenomenon. It is the result of what I have discussed here before, the return of vulgar economics (for example, here or here), and that the mainstream has abandoned the long run, and provides only a theory of short run prices. But at the same time the mainstream must revert to the old model in order to promote economic policy. Note that only in that model you can guarantee that markets provide efficient allocation of resources (w/o imperfections), and the price system signals the direction of adjustment. It is often missed by the heterodox groups that resist old classical political economy (often for incorrectly assuming that it is a precursor of marginalism) that their theory of value and their long term prices provide something completely different, an understanding of the conditions for the reproduction of society. That notion, btw, is alive and well in other social sciences (see here or here). Not in economics.

* It survived in the fringes and it was rediscovered by Marx and then much later Sraffa, who actually provided a coherent solution to some of its logical limitations. But after Ricardo, the LTV was never dominant again.

** On the gravitation of market prices towards normal prices see the work by Bellino and Serrano here.

*** My fondness for the subject in part derived from having worked for Wynne Godley at the Levy for two years, who was a disciple of P. S. W. Andrews one of the key authors of the Oxford Economists' Research Group (OERG) behind full cost pricing theories.

Misconceptions about Heterodox Economics in general and Sraffian in particular

I had discussed before the meaning of heterodox economics. I suggested a definition based on positive contributions (rather than as a critique of the mainstream) and based on concepts rather than schools of thought. In my view the two principles that were central for defining heterodoxy were the Principle of Effective Demand (PED), based on Keynes and Kalecki's ideas, and the idea that distribution is the result of class conflict, which in my view is best expressed in Sraffa's recovery of the surplus approach. And I suggested that several authors within various schools of thought (Post Keynesians, Marxists, Institutionalists, Sraffians, Feminists, Ecological economists, Structuralists, and even some Evolutionary or Schumpeterian economists) could probably accept both propositions (not Austrians, which are a fringe version of Marginalism, and as a result not an heterodox school per se). In that sense, there could be a view of heterodoxy as not necessarily fragmented set of Schools of Thought.

However, it is a different proposition to suggest that something like a consensus between heterodox schools is really emerging. That I actually doubt. John King suggests that this would be Fred Lee's position in his new book Advanced Introduction to Post Keynesian Economics (there is no direct quote, but I always interpreted Fred as suggesting that a more cohesive heterodox approach was possible rather than it was actually taking place in reality, but I might be wrong).

In fact, it is my view that, in general, not only heterodox groups, which by definition tend to be small and often concerned with specific topics, but the mainstream is quite fragmented. On macro issues, even with the New Neoclassical Synthesis, there is a lot of disagreement between New Keynesians and RBC types, particularly on policy issues. So it should not be surprising that heterodox groups are quite fragmented too. Sometimes the fragmentation within the mainstream gives the false impression that some groups are breaking away, or on the edge (see my view on that here). And it is not just fragmentation, but also confusion. Even in the mainstream there is lack of understanding about the meaning of the mainstream (see here for example).

So it should not be surprising that, given the fragmentation of the heterodoxy, several misconceptions arise. Sraffians are particularly vulnerable to this since Sraffa wrote so little, and even though his Production of Commodities is not a difficult book to read, it is one that has been often misunderstood. Marc Lavoie has responded, from a Post Keynesian and friendly standpoint, to some of these misconceptions (the fact that some people consider Austrians heterodox, but are not certain about Sraffians speaks volumes about confusion among heterodox groups too).

Yet, I was a bit surprised by some of the misconceptions in John King's book. He says that: "There is no role in Sraffian models for fundamental uncertainty, money or the principle of effective demand." In the quote he suggests that this is the position of Hart and Kriesler (2014), but if he disagrees he does not say anything. So it is safe to assume that he concurs. He complements this by arguing that: "since the relationship between the wage rate and the rate of profit in Sraffian models is monotonically declining, it is difficult (if not impossible) for the their models to incorporate a 'wage-led' growth regime." Hm, were to start.

So Garegnani pointed out long ago (in the 1960s, but the English publication was in the late 1970s; links to the English versions of both the 1960s and 1970s papers here) that not only Sraffians believe in effective demand, but that a coherent presentation of the Principle of Effective Demand requires the abandonment of marginalism (particularly the marginal efficiency of capital argument). Not only that, Garegnani is very clear in his 1960s papers that (from link above):

"As regards consumption, increases in real wages lead to a rise in consumption and hence, provided the economy has accumulation capacity that is not fully utilized, to an expansion of the productive system and to an increase in employment. Given the level of productivity in the economy, the increase in real wages will in fact cause a redistribution of income in favour of a class that consumes a major portion of its income, and with that an increase in the first component of final demand... 

a steady and continuous rise in real wages along with the consequent steady and continuous increase in consumption can serve to instil in entrepreneurs a confidence in the continuous expansion of the market for their products, inducing them to undertake investments and increases in employment and output that will in turn help to raise final demand."

So yeah the economy is wage-led. Actually, in Garegnani's debates with Marxists, with Joan Robinson and other authors on the causes of long run growth, he could be seen exactly as taking the position that profit-led regimes are not possible, in the sense that he understood that firms would not invest because of a higher rate of profit. Firms are interested in adjusting capacity to demand, and to maintain a normal level of capacity utilization. Also, one should note that Garegnani wrote his paper in the 1960s under the direct influence of Sraffa, who might also have understood the idea of the accelerator. That is why Franklin Serrano is correct in suggesting the supermultiplier is Sraffian. Not only Sraffians have effective demand, they do in the long run (not in the short run as a result of imperfections).

Two things are important in this context. First, in Sraffa's price equations, which uses the method of given quantities developed by classical political economy authors, imply that there is class conflict, and an inverse relation between the real wage and the rate of profit. However, in a theory of the determination of output in the long run, output by definition is not given and the effects of income distribution on output might be ambiguous, even if the demand regime is wage-led (for example, higher wages might lead to loss of external competitiveness, and lower exports than more than compensate the increase in consumption associated to higher wages). Second, as I noted on my previous post on Garegnani's 1960s paper, the Sraffian project was the revival of the classical theory of distribution, concomitantly with the extension of the Keynesian Principle of Effective Demand to the long run.

On the absence of money in the Sraffian system also a lot of ink has been wasted. In his Production of Commodities Sraffa famously suggests that it is the rate of interest, as determined by the monetary authority, which is the exogenous variable. So prices and real wages are determined for given technical conditions of production and the long term interest rate as set by the monetary authority. Pivetti referred to this as the monetary theory of distribution. So monetary policy has important distributive implications, and this view is perfectly compatible with Keynes' views on a normal, conventional and not psychological, rate of interest. It is also compatible with endogenous money views, that hark back to Tooke and other Banking School authors. There is money, and not in the sort of Monetarist way in which the central bank controls its quantity.

Finally, on uncertainty. True for Sraffians uncertainty is not central for unemployment (one in three), yet that does not mean is completely irrelevant or that it does not play any role. Here it is important to note that any good discussion of uncertainty suggests that the one that is central is the uncertainty about future demand. See for example Davidson in this example. So the problem is lack of demand. Autonomous demand that is. And that works, as it should, with the supermultiplier.

What's in an index? Heterodox and Developing Country Journals in Economics

Nope not about index numbers. About Rankings. Below a list of several heterodox and mainstream journals as ranked by the Thomson-Reuters citation index (the Web of Science-Social Science
Citation Index, SSCI) in the last citation report. As it can be seen heterodox journals have a considerably lower impact factor than mainstream journals. The leading heterodox journal in my list* (the Cambridge Journal of Economics) is comparable to a lower ranked mainstream journal (certainly not the bottom of the line, since it's above Economica, but low). Worse several important heterodox journals are not even ranked.

The index is calculated on the basis of the following formula (adapted from here):

A= total cites in 2014
B= 2014 cites to articles published in 2012-13 (this is a subset of A)
C= number of articles published in 2012-13
D= B/C = 2014 impact factor

The universe of of published articles (C) is what really matters for heterodox journals, it would seem. Heterodox journals would have less citations if the universe of articles involves all economic journals. The reverse would have almost no impact on mainstream journals. The late Fred Lee did some research on the bias of the conventional rankings, and built some alternative measures (subscription required). His proposal suggested separating the mainstream and heterodox fields as different disciplines.

While this solution would certainly resolve certain issues for heterodox journals, issues related to the bias in favor of journals from developed countries, and perhaps more specifically English speaking countries is not dealt in this approach. The case of  Revista de Economia Política (also known as the Brazilian Journal of Political Economy, REP or BJPE), which has been published for 35 years and is, perhaps, the leading Brazilian economics journal is illustrative in this context. The fact that REP is not indexed highlights the developed country, Anglo-Saxon bias in economics (probably true in other fields too).

Other problems occur for subdisciplines of economics that are not taken seriously by mainstream economics, like the history of ideas. For example, the History of Political Economy (HOPE) journal is not particularly heterodox (I would say mainstream is not an incorrect definition of its stance, even though it is open to and has published heterodox authors). But, as it can be seen in the table above, it ranks lower than many heterodox journals.

My concerns with a policy that separates the rankings, and makes heterodox economics a different field than mainstream economics, is that it increases the isolation of the heterodoxy, and creates the conditions to suggest that heterodox economics is not economics (there will be economics and heterodox economics). Note that rankings increasingly matter for decisions about hiring and retention. In my view, the important thing is to only use rankings with significant qualifications, and not as a the single or even the main tool to evaluate the quality of a journal.

* The list is, no doubt, incomplete. There is no way of searching for heterodox journals, so I used my memory and searched the ones that I thought relevant for the basis of this post. There is an obvious bias in the sample, but that would be about the same for the mainstream journals in the list.  For a more comprehensive list see Fred Lee's paper linked in the text.

PS: Full disclosure I'm on the board of REP and Investigación Económica (number 10 in the list above) and, also, I'm one of the founding co-editors of the Review of Keynesian Economics (ROKE; number 6 in the list).

On the blogs

For Whom the Wall Fell? -- Branko Milanovic's analysis of the effects in Eastern Europe of the transition to capitalism. Not good, by the way. Few success stories, and mostly associated to commodity booms. Worth reading also his response to Andrei Shleifer's view that the transition was a success.

Trapped in a Recession -- C.P. Chandrasekhar discusses why we are back in a "situation where finance capital is back to profitability and is thriving but the real economy and the rest of the system is mired in recession." In one word, austerity.

Obituary: Frederic S. Lee (1949-2014) -- Tae-Hee Jo has published a nice obituary with more biographical detail than previous ones.

IMF Response to the Financial and Economic Crisis -- Independent Evaluation Office (IEO) report on the IMF's role during the Great Recession. They suggest that: "The IMF’s record in surveillance was mixed. Its calls for global fiscal stimulus in 2008–09 were timely and influential, but its endorsement in 2010–11 of a shift to consolidation in some of the largest advanced economies was premature." I am more critical, as you know, but it is good that their evaluator noticed that the IMF has pushed for austerity too soon.

PS: And yes the last one is not really a blog post. But it's related to a previous blog post of mine. ;)

Frederic S. Lee

Sad news for the heterodox community, Fred Lee has passed away. He was a tireless builder of institutions, an activist for Post Keynesian, and institutionalist economics, creating space for heterodox economists and he will be sorely missed. Below one of his last presentations.

Check also his website here. His short bio from the website below.

I attended a small state college in Maryland where I majored in history and took a bit of philosophy. After graduating in 1972, I took some more philosophy courses. But then I got interested in economics and began reading books and articles by Smith, Ricardo, Marx, J. B. Clark, Schumpeter, Joan Robinson, Keynes, Kalecki, Sraffa (or at least I tried to) and others. After working in Saudi Arabia for a couple of years, I returned to the States and attended Colombia University (1976-77) where I picked my undergraduate economic courses. While there I read about everything I could find on costs, pricing, the determination of the mark up, and the business enterprise; and the economists I read included Philip Andrews, Adrian Wood, Harcourt, Hall and Hitch and many others. Because I was a Post Keynesian economist (although I did not know it), it was suggested to me that I go talk to an economists called Alfred Eichner. I did so and became part of the Post Keynesian movement. After Colombia, I went to the University of Edinburgh for a year; and then returned to Rutgers University where I got my Ph.D. My teachers included Jan Kregel, Paul Davidson, Nina Shapiro, and Eichner. In my first year, I took an independent study with Kregel and he told me that I should read the Keynes-Harrod letters regarding the General Theory which had just been published. I did so and wrote a paper which became the basis of my first article, "The Oxford Challenge to Marshallian Supply and Demand: The History of the Oxford Economists’ Research Group." I left Rutgers to take up a one-year teaching position at the University of California-Riverside; and after 3 years there I obtained a tenured position at Roosevelt University in Chicago. In 1990 I went to England where I taught at De Montfort University in Leicester for the next decade. In August 2000 I moved to Kansas City to take up my current at UMKC.

My research interests are Post Keynesian microeconomics, Post Keynesian industrial organization, and the history of economics in the 20th century, with special emphasis on the history of heterodox economics. I am currently writing a monograph on Post Keynesian microeconomic theory. In addition, I am engaged in three other projects, the history of heterodox economics in the United Kingdom since 1945, market governance in the U.S. gunpowder industry, 1865 to 1900, and Congressional response to the problem of corporate size, monopoly and competition, 1945 to 1980. This last project is quite exciting because it enables me to explore the administered price controversy, examine in detail various institutional economists such as Walton Hamilton and John Blair, and examine the way neoclassical economists used their institutional power to suppress heterodox economics. These four projects are generating a great many but more specific projects that are just perfect for Ph.D. dissertations.

PS: Barkley Rosser has written a nice post on Fred here. Other posts by Stephany Kelton, Lars Syll, David Ruccio and others have been linked here.

Classic Paper by Arestis & Eichner: "The Post-Keynesian and Institutionalist Theory of Money and Credit"

Recently, (see here) Matias posted a link to Fred Lee's collection of a classic set of by papers by the late Alfred S. Eichner. He mentioned that this not a complete set of Eichner's remarkable work, and that there are plenty of other exceptional pieces; in particular is Eichner's paper with Philip Arestis: "The Post-Keynesian and Institutionalist Theory of Money and Credit." This work has influenced my research tremendously (especially concerning the authors adherence to the tradition of Veblenian Institutionalism, and their emphasis of an 'open-systems' approach to political economy).

From the Introduction (which is worth quoting at length):

The purpose of this article is two-fold: first, to identify the main elements of what constitutes post-Keynesian and institutionalist monetary theory and, second, to put forward a model general enough to encapsulate most, if not all, of the constituent elements of the post-Keynesian and institutionalist theory of money and credit. One further novel aspect of this article is that we account for the possibility of the openness of economic systems. This is an aspect that has been ignored by the literature on both post-Keynesian and institutionalist economics. 

The emphasis in post-Keynesian and institutionalist monetary theory is on the proposition that "Monetary economics cannot help being institutional economics" [Minsky 1982, p. 280] and that "Capitalism is a monetary economy" [Dilland 1987, p. 1641]. In this view money capital is an institution that is inseparable from the other institutions that comprise economic systems. Money is not merely a medium of exchange. It is tightly linked to the behavior of the enterprise sector and the economy as a whole. Therefore, the basic theme in this approach is inevitably, "The Monetary Theory of Production" [Keynes 1973; Veblen 1964]. It is in fact this Veblenian/Keynesian premise that constitutes the core of what we have labelled in this study "the post- Keynesian and institutionalist theory of money and credit." 

In this monetary theory of production, it is not surprising to find that credit rather than money is the mechanism that enables spending units to bridge any gap between their desired level of spending and the current rate of cash inflow. Money is viewed as essentially endogenous in a credit-based economy, responding to changes in the behavior of economic entities, rather than being subject to the control of the monetary
authorities. Money, in this view, is an output of the system, with the endogenous response by the financial sector governed by the borrowing needs of firms, households, and the government. Once it is recognized that money is credit-driven and therefore endogenously determined, any money creation emanating from fiscal or debt management operations initiated by the authorities or from a favorable balance of payments, can be neutralized through an equivalent reduction in commercial bank credit brought about by the actions of private economic agents.' It clearly follows that government may not be able to create money directly (see, however, Chick [1986]). 

What it can do, instead, is redistribute money among different groups of economic agents. This can happen when governments, in their attempt to increase/reduce the stock of money, set in motion the process whereby bank credit is created/destroyed by groups of economic agents. To the extent that the latter groups are different from those initially receiving/destroying money following the government's initiatives, redistribution of money between those groups takes place. 

The endogenous nature of money and credit is further elaborated upon in the next section with the constituent elements of the model under discussion being brought together in the section that follows. It is precisely here that the openness of economic systems is emphasized and its implications for the post-Keynesian and institutionalist theory of money and credit are compared with the neoclassical view. A final section summarizes the argument.

Read rest here (subscription required).

Alfred S. Eichner's papers

Have been posted by Fred Lee and are available here. These are not a complete set of papers and books by Eichner, and I assume that they are the ones that are part of Fred's collection. Still worth checking out.

Below the text of the New York Times obituary (the pdf of the article here). Eichner had been a student of Eli Ginzberg, who was in turn a student of Wesley Mitchell and John Maurice Clark (his not too kind comments on his teachers here), and was the link to the institutionalist tradition.

Alfred S. Eichner Is Dead at 50; Major Post-Keynesian Economist

Alfred S. Eichner, a leading member of the post-Keynesian school of economics and a professor at Rutgers University, died of a heart attack Wednesday in Closter, N.J., where he lived. He was 50 years old.

Dr. Eichner suffered the attack while playing racquetball. He was pronounced dead at Pascack Valley Hospital in Westwood.

A native of Washington, he was a graduate of Columbia College and received his doctorate in economics from Columbia, where he taught from 1962 until 1971. He headed the economics department at the State University of New York in Purchase from 1971 to 1980 and joined the Rutgers faculty the following year.

Dr. Eichner edited several books, including ''A Guide to Post-Keynesian Economics'' and ''Why Economics Is Not Yet a Science,'' both published in 1983 by M. E. Sharpe. His latest book, ''The Macrodynamics of Advanced Market Economies,'' is to be published this year, also by M. E. Sharpe. 

One of the Best Teachers

He was a member of the editorial board of the Journal of Post-Keynsian Economics and he lectured widely and testified before Congressional and other legislative committees.

With Eli Ginsberg, a professor of economics at Columbia, Dr. Eichner wrote an economic history of black Americans, ''The Troublesome Presence: The American Democracy and the Negro,'' published in 1964 by Free Press. Dr. Ginsberg recalled Dr. Eichner this week as ''a first-rate historian and one of the best teachers'' of economics.

As a leader of the post-Keynesian school, a small but influential group of economists in Britain and the United States, Dr. Eichner sought to go beyond the theories of John Maynard Keynes, who advocated government intervention in the free market and public spending to increase employment.

In the view of Dr. Eichner and his colleagues, investment is the key to economic expansion. He advocated a government incomes policy to prevent inflationary wage and price settlements as an adjunct to the customary fiscal and monetary means of regulating the economy.

Dr. Eichner is survived by his wife, Barbara; their sons, Matthew and James, both of Closter; two brothers, Martin, of Palo Alto, Calif., and Stanley, of Boston, and a sister, Belle Joyce Kass of Chicago.

There is more interesting stuff in Fred's page here.

Heterodox Microeconomics

Tae-Hee Jo, Fred Lee, Nina Shapiro, and Zdravka Todorova have compiled a list of readings in Heterodox Microeconomics that deserves attention and praise (available here). The only classic book that was central in my formation that I see missing is Paolo Sylos-Labini's Oligopoly and Technical Progress (1962). My favorite graduate textbook still is the one by Fabio Petri 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.

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.

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.