Paul Davidson (1930-2024)

 

Paul (I'm next to him) and the Brazilians at the UMKC, PK Conference in 2002

Paul has passed away a few days ago. He wasn't in good shape for a while, and this was expected. He lived a long and productive life. I wasn't personally close to him, even though I met him several times from the mid-1990s onward. He went to two conferences I co-organized at the Federal University in Rio, always with Louise, which was a central figure of Post Keynesian (PK) life, and basically run the Journal of Post Keynesian Economics (JPKE) for him.

He was more effective as an institutional organizer, and as an observer of economic reality (and his main book was called Money and the Real World) than in his theoretical endeavors. His views on Keynes stayed close to the flawed discussion of the Principle of Effective Demand in chapter 3 of the General Theory, and an insistence on the importance of uncertainty and non-ergodicity in Keynes' work, that proved to be somewhat of a dead alley for PKs. He also emphasized the ideas of Tony Thirlwall, and his export-led model of growth, as a central PK contribution to economic theory. Finally, he tended to accept the views of Robert Skidelsky on Keynes' intellectual development, who, as I noted here, accepted a conventional on interpretation of Keynes' ideas, relying on imperfections to explain unemployment, even if he provided a much needed accurate biography of Keynes (in contrast to Harrod).

JPKE, that he created with Sidney Weintraub, and help from John Kenneth Galbraith among others, was central for a generation of PKs. He was part of the Trieste Summer Conferences that, in the early 1980s, that included many heterodox groups, and was the closest to Marc Lavoie's broad tent in real life, but failed to provide a unified view, and an alternative to mainstream marginalist theory. Many thought that the PK project was sectarian, and could not incorporate other views. I tend to think that the failure resulted from the fragmentation of the mainstream, that was reflected in the fragmentation of the heterodoxy, and were part of the era. Certainly not Paul's fault, who, at least in my experience, was very open and willing to debate, even if he did stick to his views. At least, not his personal fault.

When LP (Rochon) invited me to start a new journal, more or less at the time Paul was substituted as the editor of the JPKE by Jan Kregel and Randy Wray, on PK monetary economics, I suggested we needed a journal that would bring other Keynesians into the conversation. Hence, the Review of Keynesian Economics (ROKE).* Paul wrote to me once he knew about the new name of the journal. I knew from him that they had thought of naming their journal the Journal of Keynesian Economics, but the acronym would have been JOKE, so they opted for Post Keynesian, and the name stuck to the school of thought. He wasn't happy. But he understood that our project was very different.

Ours was not a journal to propagate the ideas of the heterodox followers of Keynes, and to emphasize the notion that effective demand mattered, at times that Keynesians were under attack with the neoliberal turn, and the rise of Monetarism and New Classical economics (Paul was in the book of debaters with Milton Friedman, that included also Jim Tobin, and a few other more conventional Keynesians). Ours was an attempt to recreate a Keynesian big tent (not an heterodox one) to reinforce the commonalities with all Keynesians (in spite of the many differences).

Paul was combative, forceful in his discussions, particularly about Keynes' legacy, and a key figure in the preservation of Keynesian ideas, when those were considerably less popular, and the profession moved incorrectly away from the Keynesian Consensus. Later many would gladly talk about the return of the master. Paul never abandoned him, and he was right. A great loss for the profession.

* On that see Tom Palley here and my discussion of Bob Solow's role here.

The Price of Peace by Zachary D. Carter

Each era gets its own version of Keynes. The post-war era got the sanitized biography by his disciple and friend Roy Harrod. It emphasized the somewhat late Victorian values of what he called the presuppositions of Harvey Road, Keynes’ birth place at Cambridge, representing the ethical principles that he received from his parents. Not only it avoided any discussion of Keynes' sexuality, that was verboten at that time, and not just because Keynes’ mother was still alive, but also it was well suited to the moderate Neoclassical Synthesis version of Keynesianism that came dominate American academia and the profession with its emphasis on wage rigidities and imperfections. Lord Robert Skidelsky famously argued that Harrod’s biography was “an exercise in covering up and planting false trails” (Skidelsky, 1983: xxv).

 Skidelsky had the advantage of time, and his biography – the three volumes that came out after the publication of Keynes’ Collected Writings, one might add – was more direct and truthful about his subject. Yet, the biography was published between the 1980s and the early 2000s, the period in which the crisis of Keynesian economics was complete, and his ideas forgotten, or worse, as famously noted by Robert Lucas Jr., simply ridiculed. In many ways, Skidelsky’s biography, which broke new ground on the personal life of Keynes, was defensive and did not challenge the notion that his theory relied on imperfections.

 Zachary D. Carter’s book is not quite a biography in the same way that the two cited above, or the one by Donald Moggridge, one of the co-editors of Keynes’ Collected Writings. There is little need for another detailed speculative analysis of the lesser known aspects of Keynes’ life and how these affected his economic views. Carter does something better. He provides a lively discussion of the rise and fall of Keynesian ideas, beginning with how Keynes’ developed his analytical framework, from his theoretical struggles of the 1920s, with some retrospective analysis of his previous life and work, to his premature death in 1946. He also discusses the apogee and the fall of Keynesian economics after Keynes’ death, and the rise to dominance of neoliberal ideas, at least until the last crisis. In that respect, the book has two parts. The first twelve chapters that discuss Keynes’ life and the intricate dance between economic policy debates and rapidly changing economic ideas that eventually propelled the Keynesian Revolution, and a second part from chapter thirteen to seventeen, where John Kenneth Galbraith and Joan Robinson pick up Keynes’ mantle as the proselytizers of the true Keynesian gospel. They battled not only with avowed neoliberals and anti-Keynesians like Milton Friedman and Friedrich Hayek, but also against the brand of Keynesianism that came to dominate academia, and the “greatest prophet of this ‘New Economics,’ as it would come to be known in the John F. Kennedy years, … Paul Samuelson” (p. 399).

 Read rest here.

New Book on Roy Harrod

Esteban Pérez Caldentey has just published a new book on Roy Harrod for the collection edited by Anthony Thirlwall. From the description:

This landmark book describes and analyzes the original contributions Sir Roy Harrod made to fields including microeconomics, macroeconomics, international trade and finance, growth theory, trade cycle analysis and economic methodology. Harrod’s prolific writings reflect an astounding and unique intellectual capacity, and a wide range of interests. He became Keynes´ biographer and wrote a volume on inductive logic. At the policy level, Harrod played a central role in the formulation of the Keynes´ Clearing Union plan for international monetary reform. He also actively participated in British politics and government and gained recognition as an expert in the field of international economics. Yet, until now, Harrod has remained an underrated economist, commonly misunderstood and misrepresented. This is the first major intellectual biography of Harrod to be published.

For more and to buy it go here. 

Multiplier-Accelerator and Business Cycles

 

 That would be long indeed (100 years or so for the US)

Keynesian theories of the business cycle start from the notion that the changes in income equilibrate savings to investment, and the level of activity is determined by effective demand. In that sense, the economy can fluctuate in the long run, with wage and price flexibility, around a normal position that is below full utilization of labor and capital. Unemployment is the norm. Keynes was not concerned in the GT with business cycles per se, even though he discussed the issue at the end of the book. His main concern was with what he referred to as unemployment equilibrium. It is clear in his terminology, unemployment equilibrium, instead of disequilibrium as Patinkin suggested would be more appropriate, that Keynes meant that unemployment was not the result of some type of imperfection, wage or interest rate rigidities, for example, which became the leading explanation for unemployment among the mainstream Neoclassical Synthesis or New Keynesian authors.

Keynes suggested that it was the cyclical changes in investment, which he associated with the marginal efficiency or productivity of capital, in marginalist fashion, that determined business cycle fluctuations. His correspondence with Harrod on the growth model, and Tinbergen's method, suggests that he disliked the accelerator, which was probably too mechanical for him. In that sense, cycles in Keynes own conception depended on shocks, which were associated to the state of long-term expectations, and the state of confidence.

Kalecki, which independently from Keynes advanced the Principle of Effective Demand (PED), developed an early theory of the cycle based on the interaction of Keynes’ multiplier process with the concept of the accelerator. Kalecki emphasized the role of time lags between the placing of investment, the demand for new equipment, and the delivery of the new equipment, indicating the dual role of investment as part of demand, but as creating productive capacity in the future. Further, Kalecki suggested that investment orders are a positive function of autonomous demand and a negative function of the existing capital stock.

Assuming that expectations about future demand are high, then investment would increase and through the multiplier effect it would have a reinforcing effect on income. The increase in income, in turn, would lead, according to the accelerator, to an increase in investment, leading to an economic boom. However, as investment increases, eventually new investment orders would exceed the replacement requirements, and the capital stock would also rise. This would have a negative effect on the rate of increase in investment, and new investment orders would slowdown first, and then decrease. The decreasing orders would have a negative impact on demand, and through the multiplier, lead to a reduction in the level of income, creating the conditions for a recession. The falling income would imply lower investment, following the accelerator, and even further collapse of income. In the depression, investment orders would collapse and at some point they would fall below the replacement requirements associated to depreciation, leading to a reduction in the stock of capital. Finally, the falling stock of capital would make the need for investment inevitable, and that would lead to more demand and a recovery.

The essential mechanism of the business cycle in the Kaleckian model was connected to the lags between the demand effect and the capacity effect of investment. Kalecki assumed that shocks would provide the initial spark for the business cycle, and the multiplier-accelerator mechanism would keep it going. He noted also that only under very specific circumstances would the cycle recur, and that additional shocks would be necessary to avoid a dampened cycle.

Kaldor developed a model, later formalized by Goodwin and Hicks, which allowed for the economic cycle to recur even in the absence of external shocks. The central difference in the Kaldorian model was the introduction of non-linear investment and savings functions. The idea was not to deny the existence of stochastic shocks or time lags, but to demonstrate that the economic system would also fluctuate in their absence, and that in a broad sense the capitalist system was inherently unstable.

This view of the cycle was dominant and basically accepted by the mainstream Neoclassical Synthesis in the 1950s and 60s. Yet, the notion of an endogenous cycle was one of the first victims of the attack on Keynesian economics in the 1970s. Eventually leading to the Real Business Cycles (RBC) school. Today most macroeconomic textbooks do not even mention the accelerator, even though the empirical evidence for it is overwhelming.

Hydraulic Krugman on Wynne Godley

Paul Krugman commented on the NY Times piece on Wynne. There are many little incorrect interpretations, which derive from his lack of understanding of the history of ideas. First, he equates Wynne's model with the old hydraulic Keynesianism (i.e. Neoclassical Synthesis) of Phillips (of Phillips curve fame, but also of the hydraulic model of the British economy). Nothing further from the truth.

Wynne came to economics via P. S. W. Andrews, one of his two most influential teachers at Oxford (the other being being Isaiah Berlin). Andrews and the full cost price authors that were part of the Oxford Economists' Research Group (OERG), under the leadership of Roy Harrod, and were in general more concerned with practical applications than with theoretical first principles. That influenced the way Wynne developed his skills as a modeler at the British Treasury, before being taken by Nicholas Kaldor, to head the Cambridge Department of Applied Economics (DAE), where he built together with Francis Cripps the Cambridge Economic Policy Group (CEPG).

Note that conventional hydraulic models, including the sort of Cowles models like the Klein-Goldberger model of the US economy, put great emphasis on the estimation of parameters based on certain simplistic macro behavior. Wynne took a very different approach to modeling than Klein-Goldberger. He was more concerned with what he referred to as 'model architecture' than with parameter estimation.

The architecture, which was careful about stock-flow consistency, showing that everything came from somewhere and went somewhere so to speak, also imposed a clear causality structure, which determined most of the results. In fact, Wynne believed that significant variations of the parameters might not greatly influence the end result of the model, which was used for simulations and scenarios that helped to understand how the economy functioned, rather than for strictly forecasting purposes.

Krugman then says these models were abandoned because they failed in the face of the Great Inflation of the 1970s, and because they did not deal with consumption in a coherent way. Here again he is wrong. First of all, Wynne's models had no trouble dealing with the inflation of the 1970s, correctly pointing out the effects of oil prices, devaluation, and wage pressures from the cost side rather than demand pull views, and he was one of the few that correctly foresaw the big recession that the Thatcher policies would cause.

On consumption the notion that Friedman somehow is better than Duesenberry and the relative income approach of other old Keynesians goes to show how limited is Krugman's understanding of his own tradition in the field (for more go here). Note that he believes that New Keynesians are just grafting a more sophisticated behavioral decision making approach to old Keynesian stories, without owing up to the limitations that the Old and New Keynesian models, based on rigidities and imperfections to avoid the tendency to the natural rate.

Wynne's model, in the Kaldorian tradition, with a supermultiplier determining growth, and with the Oxford pricing tradition determining prices, was free of the main limitations of the Hydraulic tradition to which Krugman belongs, whether he understands it or not. That is why Jonathan Schlefer, from the NY Times, is correct in suggesting that rebuilding macro on the basis of Wynne's work would make more sense.

On a funny note at the end, Krugman reveals his misconception about the role of old ideas in the history of science, and economics in particular. He says: "it is kind of funny to see a revival of old-fashioned macro hailed, at least by some, as the key to a reconstruction of the field." In his view, old ideas are only relevant if you can formalize them in modern garb, but are not a source of forgotten and incorrectly discarded knowledge that are better prepared to understand how the economy works. The limitations of the 'great economists' of today, make the loss of economists like Wynne all the more painful.

PS: Full disclosure, I'm quite biased on this topic, having worked for Wynne at the Levy Economics Institute for two years in 1997-98.

PS': Two additional posts by Unlearning Economics and Philip Pilkington and a link by Lars Syll (h/t for the link to Unlearning).