Some reflections on the Scandinavian countries during the crisis a Post-Keynesian case study

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

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

17. Employment rates Denmark Sweden

18. 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’

19. Growth are very alike Euro-zone

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

21. -5 -15 - 7

22. Starting point

23. 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!

24. 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)

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

28. Sweden

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

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

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

32. Unless, you have a flexible exchange rate!

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

34. 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

37. 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!