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Post-Keynesian Analysis of Scandinavian Economies: A Case Study

This paper delves into Post-Keynesian economics to analyze the Scandinavian countries during crises, exploring factors like effective demand, institutions, and growth. It discusses the role of uncertain economic realities and the principles governing employment and market systems in Denmark and Sweden. Key themes include social ontology, the welfare state's impact on employment, and the correlation between flexible labor markets and economic growth. The study provides insights into the macroeconomic dynamics and policy implications in rich countries.

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Post-Keynesian Analysis of Scandinavian Economies: A Case Study

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  1. Some reflections on the Scandinavian countries during the crisisa Post-Keynesian case study Jesper Jespersen Roskilde University jesperj@ruc.dk

  2. Structure of the paper: • Why post-Keynesian economics? Because ‘uncertainty’ and ‘social and institutional changes’ prevent us from having any determinate knowledge of the future  General Equilibrium models seem not to apply to the uncertain understanding of the changing real world economics.

  3. 2. Post-Keynesian analytical features: • Like it or not – GDP in money terms and (un)employment are focus points within PKE • The Principle of effective demand rules the roost – but, watch out, effective demand is not what (some of) you might think it is! It is a multi-facetted analytical concept • Context dependent

  4. My preferred quote from Keynes’s on Methodology: • Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. • It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time (CWK, XIV: 296) • It seems to me … that you [Roy Harrod, jj] do not repel sufficiently firmly attempts ... to turn [economics] into a pseudo-Natural-science.....’

  5. Jesper’s methodological ’iceberg’ data clock-work reflexive organism agents actors Market System Power, structures, institutions Prediction of marketsystem Understand reality Inspiration: Martin Hollis Two cultures World 1: World 2: World 3:

  6. The business sector as a whole is at the focal point of Effective Demand: • As I now think, the volume of employment is fixed by the entrepreneur under the motive of seeking to maximise his present and prospective profits; (Keynes, 1936: 77)

  7. Principle of effective demand (I) • What factors make the entrepreneurs decide on production (and employment)? Here, one cannot meaningfully separate between short run and long run, because: • if the entrepreneur does not balance his books in the short run (liquidity) and in the medium run (profitability), he/she will be out of business in the longer run • but, if he/she disregard the longer run implications of investment, competition and technology, he/she will be out of business in any case

  8. Principle of Effective Demand(II) Short run: Expectations, profit and finance • Expected aggregate demand (domestic policies and global demand) • Profitability & international competitiveness • Availability of money and finance/credit

  9. Longer run: Institutions and politics • Welfare institutions: supply & quality of labour • Technology and new products: productivity & falling rate of profit • Environmental issues: work place, products, externalities & sustainability

  10. Expected proceeds from aggregate demand Expected Aggregate profitability: competition Effective Demand Aggregate credit facilitates: the working of the banking and financial system Expected availability of supply factors: labour, capital, technology environmental conditions Figure 1: Outlines for the macroeconomic principle of effective demand The business sector ‘acts’ within a frame of agreed institutions: labour market, welfare system, tax structures, financial and political concerns

  11. Overall picture in rich countries– what is it all about? • Happiness and sustainability • Of course, I know that Ministers of Finance always talk about growth to fill their coffers • But growth alone cannot make them re-elected • Hence, we will talk about social ontology before economic growth

  12. 2003/04 Because: Life satisfaction - only up to a certain point corresponds with GDP/capita

  13. The welfare state, does it impede employment and growth?

  14. Employment rates Denmark Sweden

  15. Employment rate • Euro15 grew the fastest – 5965 percent of population, age 18-64 • Denmark grew from 74 to 76 percent of population, age 18-64 • Sweden hardly increased employment (74 percent Why? ‘We don’t know’

  16. Growth are very alike Euro-zone

  17. One percent point a year adds up to 20 points

  18. -5 -15 - 7

  19. Starting point

  20. Why did they have different (un)employment paths? • Sweden higest growth – moderate fall in unemployment – unchanged employment • Denmark (relative) low growth, lowest unemployment – middle increase employment • Euro15 (relative) low growth, high (nearly unchanged) unemployment, but the highest growth in employment! • That is puzzling!

  21. Labour market & Welfare Scandinavian countries deviate on: • Higher labour market/women participation rates (welfare state institutions) • Flexicurity – meaning flexible, but structured hiring and firing and welfare security system (unemployment benefit, and free/subsidized welfare institutions – you don’t loose your social rights, when you get fired)

  22. Correlation: 1971-2010: -0,46 1990-2010: -0,58 EU13: 1991-2010: -0,49 Denmark: 1990-2010: -0,83

  23. Sweden

  24. Inflation? • You have to separate between • Consumer price inflation • Wage cost inflation • Scandinavia is more like Southern Europe, than like Germany

  25. Consumer price harmonization might give a misleading signal due to the single market effect

  26. Because, no one can beat the Germans in unit labour cost!

  27. Unless, you have a flexible exchange rate!

  28. No wonder Sweden is doing well: export led growthDenmark is doing less well; oil & gaz does the trick Balance-of-payments, current account

  29. Rate of Interest • Depends on the Balance-of-payments • Especially, if you have your own currency • If the competitive position is weak, profits are squeezed and effective demand is weakened  Unemployment Spain is the arch example, but Scandinavian back in the 1970s & 1980s

  30. What have we learned? • Economics is not a blind machinery • Different institutions (Banks) and politics (exchange rate) matters a lot – e.g. the actual situation • Compared to the 1930s, the western world has become much richer, closer integrated and, I think, more supportive • Hence, priorities may change from growth to sustainability Really, this is a Post-Keynesian story!

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