Post-Keynesian Economics - I

1. Post-KeynesianEconomics - I D. Allen Dalton ECON 325 – Radical Economics Boise State University Fall 2011

2. OriginsandDevelopment

3. The Founders • John Maynard Keynes (1883-1946) • The General Theory of Employment, Interest, and Money (1936) • Post-Keynesians argue that his views have been bastardized as they have been incorporated into orthodox economics

4. The Founders Michal Kalecki (1899-1970) Selected Essays on the Dynamics of the Capitalist Economy, 1933-1970 (1971) Came to many of the “Keynesian” conclusions by a slightly different route, stated more boldly and without compromise

5. The Founders Piero Sraffa (1898-1983) Production of Commodities by Means of Commodities (1960) Revival of Classical economics and the importance of distributional issues to the demand and supply of goods “Neo-Ricardians”

6. Major Adherents Nicholas Kaldor (1908-1986) Essays on Value and Distribution (1960) Essays on Economic Stability and Growth (1960) Economics Without Equilibrium (1985) Critique of equilibrium economics and co-developer of “Cambridge” growth models

7. Major Adherents Joan Robinson (1903-1983) The Accumulation of Capital (1956) Essays in the Theory of Economic Growth (1962) Co-developer with Kaldor of Growth theory emphasizing income distribution Major disputant in the “Cambridge capital controversy”

8. Major Adherents Hyman Minsky (1919-1996) John Maynard Keynes (1975) Can “It” Happen Again”? Essays on Instability and Finance (1982) Financial Instability Hypothesis – nature of financial institutions in modern capitalism produce recurring instability

9. Major Adherents Paul Davidson (1930 - ) Money and the Real World (1978) Post Keynesian Macroeconomic Theory (1994) Financial Markets, Money and the Real World (2003) Major American proponent and an advocate of “fundamentalism”

10. Modern Representatives • Marc Lavoie • Introduction of Post-Keynesian Economics (2006) • J.E. King • Conversations with Post-Keynesians (1994) • Elgar Companion to Post Keynesian Economics (2003) • Sheila Dow • Money and the Economic Process (1993) • Frederic S. Lee • Post Keynesian Price Theory (1999) • Giusepp Fontana • Money, Uncertainty and Time (2008)

11. SchoolorTradition?

12. Multiplicity and Commonality Davidson, “Reviving Keynes’ Revolution” The Keynesian View Rejection of (1) axiom of gross substitution, (2) axiom of reals, and (3) axiom of ergodic economic world. In the real world, (1) money matters – is non-neutral- in both short and long runs; (2) economy moves from irrevocable past into uncertain future; (3) forward contracts are institution to organize time-consuming production; (4) unemployment is common feature of laissez-faire, monetary market economies

13. Multiplicity and Commonality Eichner and Kregel, “An Essay…” Four Distinguishing Characteristics of Post Keynesianism Growth Dynamics Growth is not a process of movement from one equilibrium to another but a disequilibrium process Distributional Effects Income distribution variable related to rate of economic expansion

14. Multiplicity and Commonality Eichner and Kregel, “An Essay…” Four Distinguishing Characteristics of Post Keynesianism Keynesian Constraints Money flows tie together and affect different sectors; distinction between discretionary and non-discretionary income and expenditures Microeconomic Base Wages and prices are not determined by demand and supply; wages are determined by discretionary expenditures and prices by mark-up rules

15. Methodology

16. Methodology • Lawson, “The Nature of Post Keynesianism…” (1) Dissatisfaction with Orthodoxy (2) Emphasis on Methodology (3) Shared Themes, Divergent Models (4) Roots lie in Keynes (and/or classical economics, contemporaries of Keynes, Marx)

17. Methodology Shared Themes Economy as dynamic historical process Uncertainty central to economic life Distribution of income/wealth central to understanding of economy Human choice is real Institutions (money and power structures) shape economy Goals of policy extend beyond efficiency and growth Divergent Models Post-Keynesian models of particular behavior don’t necessarily fit well together (or at all)

18. Critique of Orthodox Method • Lawson’s article relevant to all heterodox schools of thought • Nature of Contemporary Economics • Three essential features • Conception of science as explaining regularities • Related conception of human agents as essentially passive responders to knowledge stimuli • Reluctance to engage methodological questions

19. Critique of Orthodox Method Neoclassical Orthodox Method Humean version of Positivism Empirical realism – reality restricted to objects of direct experience General knowledge must be of patterns of related events in space over time Science can only be about conjunction of events

20. Transcendental Realism “…reality is constituted not only by events, and our experience or perception of these events, but also by (irreducible) structures, mechanisms, powers, and tendencies that, although perhaps not directly observable, nevertheless underlie actual events and govern or produce them.” (p.121)

21. Transcendental Realism Three domains of reality Empirical (experience) Actual (events and situations) Non-actual (underlying structures) Science’s primary concern is identifying structures/mechanisms that underlie events Humans are recognized as possessing transformative capacities, able to intervene and manipulate reality

22. Transcendental Realism “… the essential mode of inference warranted by the transcendental realist perspective is neither induction nor deduction but one that can by styled reduction or abduction or “as if” reasoning. It consists in the movement from a conception of some phenomenon of interest to a conception of some totally different type of thing…that is responsible for the given phenomenon.” (p.123)

23. Transcendental Realism Consequences of Adoption Realization that adherence to Humean view means knowledge fenced off from the real world (only valid in experimental situations or ceteris paribus) Laws are tendencies that exist whenever the initiating causal forces exist Event regularities don’t exist in the social sciences because people possess capacity of real choice; choice presupposes events could have been different

24. Transcendental Realism “…if choice is real, then human actions must be intentional under some description, Now all agency (whether human and intentional or otherwise) is inherently transformational. Its exercise thus necessitates there are real material cases that proceed it. …human activity cannot take place without means, media, and resources of some kind – conditions which, through human agency, come to be transformed.

25. Transcendental Realism The intentionality aspect of human agency is, in turn, bound up with knowledgeability. For agents must have some knowledge at least of the conditions that render their intended acts, when they are, as feasible. In turn again, of course, knowledge presupposes sufficient endurability in the objects of knowledge to facilitate their coming to be known. Now, if event regularities, or

26. Transcendental Realism at least significant ones, do not, as widely reported, generally occur in the social realm, then the enduring objects of knowledge must lie at a different level – at that of structures that govern, but that are irreducible to, events, including human activities, of experience.” (p. 126)

27. An application The “Law of Demand” Event regularity or Behavioral pattern? Is it an ever-present “power” or “tendency” or does it only exist within an experimental (laboratory) setting? Is ceteris paribus necessary or do there exist Laws of Demand, any one of which might be operative if the initiating causal force exists?

28. Consequences for Social Sciences Because human agency is transformative, social structures are inescapably space-time bounded. Social science is necessarily historical and geographical in nature. The phenomena to be explained are social activities governed by social structures. Explanation entails providing an understanding of practices and activities. Social activities draw upon and reproduce social structure. An explicit elaboration is required for the contact between human agency and social structure.

29. Relationship to Post-Keynesianism The generalized shared themes of Post-Keynesianism are reflective of the rejection of the Positivist underpinnings of Orthodoxy and the implicit acceptance of Transcendental Realism as an alternative methodology. Diversity is part of the competitive weeding out of models of necessarily complex social phenomena.

30. Roots of Post-Keynesianism Keynes’ rejection of event laws Marx’s rejection of Humean Positivism Classical economist’s interpretation of society as driven by divergent interests of members of divergent classes

31. Roots of Post-Keynesianism Keynes’ rejection of event laws Marx’s rejection of Humean Positivism Classical economist’s interpretation of society as driven by divergent interests of members of divergent classes

32. Presuppositions of Post-KeynesianMacroeconomics

33. Relationship between Traditions Marc Lavoie,Introduction to Post-Keynesian Economics

34. Epistemology Orthodoxy – Instrumentalism Theories are good if they allow for accurate predictions and they advance analysis PK – Realism Theories must help us tell a relevant story of how the economy actually works, beginning with reality and stylized facts

35. Ontology Orthodoxy – Methodological Individualism The heart of analysis is the individual; “atomistic individual;” institutional actions explainable only as result of individual actions PK – Methodological Holism Individuals are social beings under influence of environment and institutions; institutions have “life of own;” institutions not perceived as imperfections or impediments

36. Rationality Orthodoxy – Substantive Rationality Agents possess quasi-unlimited knowledge and hyper-ability to optimize PK – Procedural Rationality Agent rationality is bounded – limits to ability to acquire and process information; insufficient information often leads to postponing decisions Agents “satisfice;” rules of thumb are rational responses to uncertainty and complexity

37. Analytical Focus Orthodoxy – Scarcity & Exchange Scarcity is central fact that governs behavior; relationships are viewed within a framework of exchange PK – Production & Growth Primary focus on need to create necessary resources to contribute to wealth through organizing production

38. Analytical Focus “What is emphasized among post-Keynesian economists is the degree to which these resources are utilized. In this sense, the economy usually operates within the boundaries of the production possibility frontier, which is itself quite flexible. As a result, there are always opportunities for a free lunch. …Economists therefore should not focus on the allocation of scarce resources; rather they should concentrate on going beyond scarcity, when, and if ever, scarcity arises. - Lavoie, Introduction, p. 10-11

39. Political Core Orthodoxy “Neoclassical authors pretend their theories are free from any ideology.” “The majority of neoclassical economists favour free enterprise and laissez-faire…” “All neoclassical economists believe that if it were possible to rid markets of various imperfections that limit competition and the availability of perfect information, flexible prices would bring the economy to a perfect equilibrium.”

40. Political Core Post-Keynesians “Recognize that ideology drives economic research.” “To various degrees, they question both the efficiency and fairness of market mechanisms, as well as their assumed existence.” “It is impossible to have ‘free markets’ since they cannot regulate themselves.” “Heterodox economists see pure competition as simply a transitory situation…competititon will lead to oligopolies and monopolies. The state mist regulate markets, and at the macroeconomic level, it must regulate aggregate demand.”

41. Essential Characteristics The Principle of Effective Demand Production adjusts to demand for goods Investment not tied to intertemporal consumption decisions by households Long-run is not constrained by supply (2) Dynamic Historical Time Time and decisions (to some extent) are irreversible Path-dependency (long-run is result of short-run) Dynamic models need to explain changes in the productive structure

42. Auxiliary Features Inefficacy of Flexible Prices Strong income effects make flexible prices counter-productive (2) Monetary Production Economy Contracts are in money; debts and assets impose financial constraints; endogenous money means investment can preceed saving (3) Fundamental Uncertainty Future inherently unknowable; liquidity preference as consequence (4) Relevant microeconomics Choice often lexiographic; For firms, diminishing returns don’t exist (5) Theoretical pluralism Reality can take different forms; different theories are a necessary consequence

43. Strands of Post-Keynesianism Fundamentalists Sraffian Kaleckian

44. Fundamentalists Emphasis Fundamental Uncertainty Endogenous Money Liquidity Preference Financial Instability Maintain many neoclassical claims Strategic mistake to attempt to integrate strands of Post-Keynesianism Davidson and Minsky

45. Sraffians Emphasis Relative Prices Techniques of Production Interdependence of multi-sector production While criticizing Marxian labor theory of value, attempts to preserve a labor theory of value Little concern with historical time Sraffa and Marx

46. Kaleckians Emphasis Role and Realization of Profits Microeconomics, especially product pricing and firm behavior Kalecki, Marx, Kaldor, Robinson