On Money and the Interest Rate

David Fields (guest blogger)

A capitalist economy is a monetized production system, that is, economic activity is predicated upon the extent to which financial institutions extend credit to enterprises. Consequently, output expansion is mediated by the mechanisms of banking. The ability of firms to acquire necessary labor and material inputs, essential for fulfilling profit expectations and enabling wage disbursements to workers, is contingent upon the scope of debt obligations. Credit, thus, functions as a social technology of deferred payment and settlement, establishing a relatively secure contractual claim that enables entrepreneurs to address uncertainty and facilitate long-term operational expansion, as determined by the level of aggregate demand. Restrictions on credit invariably nullify attempts at increased production. Banks facilitate the prepayment of firms for capital goods and labor costs, sustaining production and distribution prior to the realization of profits from projected consumer goods sales.

Proportional shares of accumulated profits are transferred to the banking sector. Firms are obligated to deduct interest payments from their collateralized deposit schedules of future revenue. This is called the reflux mechanism, or monetary circuit, which can be represented by the following Marxian schema:

                                                           M* – M – C’ – M’ – M*’

where M* denotes bank loans to firms that enable the production process (M – C’ – M’), ultimately converted into M*’, representing interest payments to the financier from realized profits, M’. The difference (M' - M), profit, is regulated by the financial provisions offered by banks , which are subject to the interest rate is set by a nation's central bank. Hence, the interest rate is a conventionally determined distributive variable that ultimately determines the proportional allocation of income.

Consequently, should the central bank implement and sustain elevated interest rates over extended duration while aggregate demand remains subdued due to insufficient fiscal policy, a decline in real wages will ensue, unless there is effective labor resistance. In this sense, what can be defined as monetary austerity sacrifices long-term productive investment, unless there is an effective counter-cyclical fiscal space, which is limited for states that faces balance of payments constraints.

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.

Policies for Prosperity: from COVID-depression to Sustainable Growth

With Tom Ferguson, Mario Seccareccia, and Anna-Maria Variato, organized by L-P. Rochon. Next Monday on a computer near you.

Rochon on Lavoie

The Progressive Economics Forum holds its annual meetings at the Canadian Economics Association (CEA) conference. This year we are at Ryerson University, Toronto, Thursday, May 28 to Sunday, May 31, 2015.

Introducing Marc Lavoie 
May 29, 2015

By Louis-Philippe Rochon

I am very honoured to be introducing this year’s guest speaker.

When I was asked to introduce him, I found myself in a bit of a conundrum.

After all, how can I possibly do this in just 5 minutes?  I mean it is impossible to do justice to his work over the last 35 years in such a short time.  His CV by the way is 40 pages long. So one would need quite possibly a good hour to cover all the important features of our guest’s distinguished career.

Marc Lavoie obtained his doctorate from Sorbonne Paris 1 in 1979 and arrived at the University of Ottawa the same year.  It was only a few years later, in 1983, I believe, that I had him as a professor.  I took Introduction to Post-Keynesian Economics  (with a hyphen!) largely because nothing else fit my schedule.  I must admit I was a bit reluctant to take the course as other students were telling me to stay away. But, I did anyways and the rest, as the old saying goes, is history.

Marc has a long – very long – list of publications.  To wit, he has published, at last count, over 120 peer-reviewed journal articles and 71 book articles; he has written 10 books, and edited another six.

Among the books he has written, we have an excellent first-year textbook, co-written with his colleague of 35 years, Mario Seccareccia, who was also my professor.

There is also a book that has contributed to the emergence of an entire new approach, the so-called stock-flow consistent approach, which has seduced a great many young, and not so young, scholars.  Today, there are a great many articles and conferences dedicated to that approach.

The book, Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, was co-written with Wynne Godley, and, like many of his other books, has had a tremendous impact on post-Keynesian economics.  It is safe to say that Marc has single-handedly given great empirical “legitimacy” to heterodox economics.

Another book is his Introduction to Post-Keynesian Economics. First written in French for the famous Repères series, I had the privilege of translating it in English (something by the way I will never do again, and I think Marc will agree on that!), and it has also been translated into Spanish, Japanese, Mandarin, with Italian and Korean translations in the works. I hear a Klingon version is next!

His most recent book, a greatly expanded version of his quintessential 1992 tome, is by any definition an essential book for anyone wanting to learn about post-Keynesian and heterodox economics. Indeed, Post-Keynesian Economics: New Foundations, in my opinion, towers high above all other books on the topic, and offers readers great insights into the essential features, both micro and macro, of post-Keynesian economics. In my opinion, this book is already a classic. I am certain, in several decades from now, it will be regarded as one of the greatest written on Post-Keynesian economics.

Among his edited volumes, I want to point to three in particular.  His most recent with Fred Lee (2013) In Defense of Post-Keynesian Economics and Heterodox Economics: Response to their Critics, is an excellent collection of articles addressing directly the many critics of heterodox economics.

Another book, entitled Money and Macroeconomic Issues: Alfred Eichner and Post-Keynesian Economics (2010), reflects on the great work of Alfred Eichner, an economist who has greatly influenced Marc’s thinking.  It is a book, which was co-edited by Mario Seccareccia and myself.

Finally, another great book, co-edited with Mario Seccareccia, on Central Banking in the Modern World: Alternative Perspectives (2004) has many excellent articles on credit, money and central banking.

Now, while many here know his writings in economic theory, monetary theory and policy, fiscal policy, endogenous money, growth theory, price theory, Marc also has a whole other life in sports economics. This is perhaps a reflection of his avid interest in sports, having been named not once, but twice, Carleton University’s Male Athlete of the Year (1973-74, 1974-75).  He is greatly passionate about fencing, for which he not only won the Canadian national senior championship in sabre seven times, but also represented Canada in the 1975, 1979 and 1983 Pan-American Games (where he finished 4th in the individual event in sabre in 1979). He also participated in the Commonwealth championships in 1974 (4th), 1978 (2nd) and 1982, and competed at the 1976 and the 1984 Summer Olympics.

He is currently Managing co-editor of the European Journal of Economics and Economic Theory: Intervention, and is on the editorial board or Executive Board of 13 journals, including my own journal, the Review of Keynesian Economics. He has lectured around the world, in far too many places to list.

There is no doubt that Marc’s contribution to economics and to post-Keynesian economics in particular has influenced a generation of scholars. Many regard him, and rightly so, as one the greatest scholars in the heterodox tradition. I concur.

As an example, I am currently editing a set of 3 anthologies in post-Keynesian economics for Edward Elgar.  So last month, out of curiosity, I posted a few messages on FB, asking the over 200 post-Keynesian and heterodox economists I know there from around the world, which was their most influential article on monetary theory.  Of those who replied to me by email, close to 80% stated that’s Marc’s 1996 article in the Scottish Journal of Political Economy was probably the most important post-Keynesian article on endogenous money, with another 15% mentioned his 1996 article in Money in Motion.

In closing, I need to mention one last important contribution.

Above, I often interchanged the word post-Keynesian for heterodox.  This was deliberate. It reflects Marc’s deep passion for a unified heterodox approach.  Where many of our colleagues, including myself, see differences and quarrels, Marc sees similarities and bridges among the various heterodox traditions; where some argued for the exclusion of some approach from the post-Keynesian family, Marc insisted on casting a large post-classical tent, and pointed to what united us rather than divided us.  This has been a consistent theme throughout his career and his writings.

I am running out of time.  Well, like I said, it is difficult to do justice to his long career in such a short time, and this was the root of the conundrum I faced. But well, upon deeper reflection, I guess there really is no conundrum.

I don’t need longer than 5 minutes, I am happy with less. Since in the end, we all agree, our distinguished guest needs no introduction.

Ladies and gentlemen, Marc Lavoie

For more information on the PEF at the CEA, see here.

New Book: The Encyclopedia of Central Banking

New book on central banking, edited by L-P Rochon & Sergio Rossi, has recently been published. I have two chapters: 1. on Classical Dichotomy, & 2. on Dollar Hegemony.

See here.

PS: Posted here with an entry on Bretton Woods by Omar Hamouda.

L-P Rochon on Making sense of U.S. and Canadian labour market data

By Louis-Philippe Rochon

If you’re watching labour market statistics on both sides of the U.S. and Canadian border, you might think our economies are heading in very different directions. But a closer look shows that there are striking — and troubling — similarities. The U.S. economy seems to be outperforming expectations, according to labour market data released last week. In February alone, the it added more than 295,000 jobs; the 12th time in a row monthly job creation was at least 200,000. Job creation is widespread across all sectors and demographics, suggesting a firmly-rooted recovery. Unemployment has shrunk to 5.5 per cent, which is where it stood in May 2008. Finally, as the Secretary of Labour, Thomas E. Perez, boasted last week, February marks the first time in more than three decades that unemployment fell in all 50 states. What more could you say? Apparently, the U.S. is on course for a strong growth spurt, fuelling fear of inflation, which may convince the Federal Reserve to raise interest rates sooner than expected. But we mustn’t believe everything the man behind the curtain is saying. 

Read rest here.

Encyclopedia of Central Banking

So LP Rochon has edited this Encyclopedia, with Sergio Rossi.

LP sent me the entry on Bretton Woods Regime, by Omar Hamouda, as a teaser.

"Bretton Woods is a location, period of history, beginning of an era in the twentieth century, birth of an international organization, but, most of all, an international monetary system to regulate trade, peg currencies to one standard, and maintain a regime of fixed exchange- rate parity.

In July 1944 at Bretton Woods, New Hampshire, 44 nations under official British and American leadership set up economic measures for post- war reconstruction. The US dollar – pegged to gold – was approved as the new monetary standard. Two new insti tutions were also established with specific tasks: the Stabilization Fund (International Monetary Fund, IMF), a “special organization” (Horsefield, 1969, p. 39), to be a watchdog facilitating and promoting trade through monetary stabilization, and the International Bank for Reconstruction and Development (World Bank), with the role of providing member nations with “necessary capital not otherwise available except possibly on too costly terms” (ibid.)."

Read rest here.

ROKE on endogenous money (or MMT)

Issue 2 of the Review of Keynesian Economics (ROKE) is devoted to the “Theory of Endogenous Money”, and two articles (by Scott T. Fullwiler and by Louis-Philippe Rochon and Sergio Rossi) are available free on line here.

Also ROKE is planning a special issue on “The Economics of Deflation.” Articles can address theory, policy, history, and country specific experiences. Papers are due May 1, 2014. Further details on the submission and review process are available here.

ROKE: Why we are launching a new journal

By Thomas I. Palley, Louis-Phillipe Rochon and Matías Vernengo

It is widely recognized that economic crises can trigger enormous change, with regard to both economic theory and the politics of governance. Today, the global economy is struggling with the fall-out from the financial crash of 2008 and the Great Recession of 2007–2009. The economic crisis that these events have generated, combined with the failure of the mainstream economics profession, has again put the question of change on the table. Reasonable people do not expect economists to predict the daily movements of the stock market, but they do expect them to anticipate and explain major imminent economic developments. On that score, the profession failed catastrophically, revealing fundamental theoretical inadequacies.

This intellectual failure has prompted us to launch the Review of Keynesian Economics (ROKE), the first issue of which is fully available here. At a time of journal proliferation, some may wonder about the need for another journal. We would respond there is a proliferation of journals, but that proliferation is essentially within one intellectual paradigm. As such, it obscures the fact that the range of theoretical inquiry is actually very narrow. A journal devoted to Keynesian economics is therefore needed, both to correct this narrowness and because events have once again confirmed the profound relevance of Keynesian theory. As noted by Robert Solow, a member of the board of ROKE, our project is “counter-cultural, and god knows the current culture needs to be countered.”

Read the rest here.

Rochon and Docherty on the future of PK economics

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

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

Read the rest here.