the post keynesians

The Post The Post KeynesiansKeynesiansIntermediate MacroeconomicsIntermediate Macroeconomics

ECON-305 Spring 2013ECON-305 Spring 2013Professor DaltonProfessor Dalton

Boise State UniversityBoise State University

OriginsOriginsandand

DevelopmentDevelopment

The FoundersThe Founders John Maynard Keynes John Maynard Keynes

(1883-1946)(1883-1946) The General Theory of The General Theory of

Employment, Interest, Employment, Interest, and Moneyand Money (1936) (1936) Post-Keynesians argue Post-Keynesians argue

that his views have been that his views have been bastardized as they have bastardized as they have been incorporated into been incorporated into orthodox economicsorthodox economics

The FoundersThe Founders Michal Kalecki (1899-Michal Kalecki (1899-

1970)1970) Selected Essays on the Selected Essays on the

Dynamics of the Capitalist Dynamics of the Capitalist Economy, 1933-1970Economy, 1933-1970 (1971)(1971) Came to many of the Came to many of the

“Keynesian” conclusions by “Keynesian” conclusions by a slightly different route, a slightly different route, stated more boldly and stated more boldly and without compromisewithout compromise

The FoundersThe Founders Piero Sraffa (1898-1983)Piero Sraffa (1898-1983)

Production of Production of Commodities by Means of Commodities by Means of CommoditiesCommodities (1960) (1960) Revival of Classical Revival of Classical

economics and the economics and the importance of distributional importance of distributional issues to the demand and issues to the demand and supply of goodssupply of goods

““Neo-Ricardians”Neo-Ricardians”

SchoolSchooloror

Tradition?Tradition?

FundamentalistsFundamentalists EmphasisEmphasis

Fundamental UncertaintyFundamental Uncertainty Endogenous MoneyEndogenous Money Liquidity PreferenceLiquidity Preference Financial InstabilityFinancial Instability

Maintain many neoclassical claimsMaintain many neoclassical claims Strategic mistake to attempt to Strategic mistake to attempt to

integrate strands of Post-Keynesianismintegrate strands of Post-Keynesianism Davidson and MinskyDavidson and Minsky

SraffiansSraffians EmphasisEmphasis

Relative PricesRelative Prices Techniques of ProductionTechniques of Production Interdependence of multi-sector Interdependence of multi-sector

productionproduction While criticizing Marxian labor theory of While criticizing Marxian labor theory of

value, attempts to preserve a labor value, attempts to preserve a labor theory of valuetheory of value

Little concern with historical timeLittle concern with historical time Sraffa and MarxSraffa and Marx

KaleckiansKaleckians EmphasisEmphasis

Role and Realization of ProfitsRole and Realization of Profits Microeconomics, especially product Microeconomics, especially product

pricing and firm behaviorpricing and firm behavior

Kalecki, Marx, Kaldor, RobinsonKalecki, Marx, Kaldor, Robinson

Paul DavidsonPaul Davidson

Money and the Real Money and the Real WorldWorld (1978) (1978)

Post Keynesian Post Keynesian Macroeconomic TheoryMacroeconomic Theory (1994)(1994)

Financial Markets, Financial Markets, Money and the Real Money and the Real WorldWorld (2003) (2003) Major American Major American

proponent and an proponent and an advocate of advocate of “fundamentalism”“fundamentalism”

Fundamentalist PKFundamentalist PKThe Keynesian ViewThe Keynesian View

Rejection of (1) axiom of gross Rejection of (1) axiom of gross substitution, (2) axiom of reals, and (3) substitution, (2) axiom of reals, and (3) axiom of ergodic economic world.axiom of ergodic economic world.

In the real world, (1) money matters – is In the real world, (1) money matters – is non-neutral- in both short and long runs; non-neutral- in both short and long runs; (2) economy moves from irrevocable past (2) economy moves from irrevocable past into uncertain future; (3) forward into uncertain future; (3) forward contracts are institution to organize time-contracts are institution to organize time-consuming production; (4) consuming production; (4) unemployment is common feature of unemployment is common feature of laissez-faire, monetary market economieslaissez-faire, monetary market economies

MethodologyMethodology Shared ThemesShared Themes

Economy as dynamic historical processEconomy as dynamic historical process Uncertainty central to economic lifeUncertainty central to economic life Distribution of income/wealth central to Distribution of income/wealth central to

understanding of economyunderstanding of economy Human choice is realHuman choice is real Institutions (money and power structures) shape Institutions (money and power structures) shape

economyeconomy Goals of policy extend beyond efficiency and Goals of policy extend beyond efficiency and

growthgrowth Divergent ModelsDivergent Models

Post-Keynesian models of particular behavior Post-Keynesian models of particular behavior don’t necessarily fit well together (or at all)don’t necessarily fit well together (or at all)

Presuppositions Presuppositions of Post-of Post-

KeynesianKeynesianMacroeconomicsMacroeconomics

RationalityRationality Orthodoxy – Substantive RationalityOrthodoxy – Substantive Rationality

Agents possess quasi-unlimited Agents possess quasi-unlimited knowledge and hyper-ability to optimizeknowledge and hyper-ability to optimize

PK – Procedural RationalityPK – Procedural Rationality Agent rationality is bounded – limits to Agent rationality is bounded – limits to

ability to acquire and process information; ability to acquire and process information; insufficient information often leads to insufficient information often leads to postponingpostponing decisions decisions

Agents “satisfice;” rules of thumb are Agents “satisfice;” rules of thumb are rational responses to uncertainty and rational responses to uncertainty and complexitycomplexity

Analytical FocusAnalytical Focus Orthodoxy – Scarcity & ExchangeOrthodoxy – Scarcity & Exchange

Scarcity is central fact that governs Scarcity is central fact that governs behavior; relationships are viewed behavior; relationships are viewed within a framework of exchangewithin a framework of exchange

PK – Production & GrowthPK – Production & Growth Primary focus on need to create Primary focus on need to create

necessary resources to contribute necessary resources to contribute to wealth through organizing to wealth through organizing productionproduction

Analytical FocusAnalytical Focus““What is emphasized among post-Keynesian What is emphasized among post-Keynesian

economists is the degree to which these economists is the degree to which these resources are utilized. In this sense, the resources are utilized. In this sense, the economy usually operates within the economy usually operates within the boundaries of the production possibility boundaries of the production possibility frontier, which is itself quite flexible. As a frontier, which is itself quite flexible. As a result, there are always opportunities for a result, there are always opportunities for a free lunch. …Economists therefore should free lunch. …Economists therefore should not focus on the allocation of scarce not focus on the allocation of scarce resources; rather they should concentrate resources; rather they should concentrate on going beyond scarcity, when, and if on going beyond scarcity, when, and if ever, scarcity arises.ever, scarcity arises.

- Lavoie, - Lavoie, IntroductionIntroduction, p. 10-11, p. 10-11

Essential CharacteristicsEssential Characteristics(1)(1) The Principle of Effective DemandThe Principle of Effective Demand

Production adjusts to demand for goodsProduction adjusts to demand for goods Investment not tied to intertemporal Investment not tied to intertemporal

consumption decisions by householdsconsumption decisions by households Long-run is not constrained by supplyLong-run is not constrained by supply

(2) Dynamic Historical Time(2) Dynamic Historical Time Time and decisions (to some extent) are Time and decisions (to some extent) are

irreversibleirreversible Path-dependency (long-run is result of Path-dependency (long-run is result of

short-run)short-run) Dynamic models need to explain Dynamic models need to explain

changes in the productive structurechanges in the productive structure

Auxiliary FeaturesAuxiliary Features(1) Inefficacy of Flexible Prices(1) Inefficacy of Flexible Prices

Strong income effects make flexible prices counter-Strong income effects make flexible prices counter-productiveproductive

(2) Monetary Production Economy(2) Monetary Production Economy Contracts are in money; debts and assets impose Contracts are in money; debts and assets impose

financial constraints; endogenous money means financial constraints; endogenous money means investment can preceed savinginvestment can preceed saving

(3) Fundamental Uncertainty(3) Fundamental Uncertainty Future inherently unknowable; liquidity preference Future inherently unknowable; liquidity preference

as consequenceas consequence

(4) Relevant microeconomics(4) Relevant microeconomics Choice often lexiographic; For firms, diminishing Choice often lexiographic; For firms, diminishing

returns don’t existreturns don’t exist

(5) Theoretical pluralism(5) Theoretical pluralism Reality can take different forms; different theories Reality can take different forms; different theories

are a necessary consequenceare a necessary consequence

Monetary TheoryMonetary Theory Endogenous MoneyEndogenous Money

Supply of money determined by the Supply of money determined by the demand for bank credit and the public’s demand for bank credit and the public’s preferences.preferences.

Creation of loans and hence deposits is Creation of loans and hence deposits is ex nihiloex nihilo – – without previous reserves without previous reserves - - all that is needed is a credible borrower.all that is needed is a credible borrower.

Banks obtain cash and required reserves Banks obtain cash and required reserves from the central bank as a consequence from the central bank as a consequence of loan-creation.of loan-creation.

Monetary TheoryMonetary Theory

All moneyAll money(reserves, currency, (reserves, currency,

deposits) deposits)

is endogenousis endogenousand demand-and demand-determined!determined!

Monetary TheoryMonetary Theory All interest rates are tied to the All interest rates are tied to the

“benchmark rate” that is “benchmark rate” that is administeredadministered by the central bank. by the central bank.

The rate chosen by the central bank The rate chosen by the central bank is described by a reaction function, is described by a reaction function, specifying the policy goals the specifying the policy goals the central bank has.central bank has. e.g., raise interest rates when the e.g., raise interest rates when the

inflation is rising, unemployment falling, inflation is rising, unemployment falling, capacity utilization is high.capacity utilization is high.

Monetary TheoryMonetary Theory At any given point At any given point

in time, the supply in time, the supply of money is of money is perfectly elastic at perfectly elastic at the benchmark the benchmark rate. rate.

The demand for The demand for money is money is determined by the determined by the loan rate of loan rate of interest, the growth interest, the growth rate of output, the rate of output, the growth rate of growth rate of prices and the rate prices and the rate of investment.of investment.

i

High-powered Money

St2

St1

St0

D

R

Financial Instability Financial Instability HypothesisHypothesis

Focus on “capital development of Focus on “capital development of economy” rather than “allocation of economy” rather than “allocation of resources”resources”

Capital development is accompanied by Capital development is accompanied by exchanges of present money for future exchanges of present money for future moneymoney ““Present money” pays for resources into Present money” pays for resources into

production of investment output; “Future production of investment output; “Future money” is the profits accruing to capital-money” is the profits accruing to capital-asset owning firmsasset owning firms

Control over capital stock is financed by Control over capital stock is financed by liabilitiesliabilities


Liability Structures: the balance sheet Liability Structures: the balance sheet of firms determine a time-series of of firms determine a time-series of payment commitments and time-series payment commitments and time-series of of conjectured conjectured cash receiptscash receipts Money flows are from depositors to banks to Money flows are from depositors to banks to

firms, and then from firms to banks to firms, and then from firms to banks to depositorsdepositors

Flow of money to firms is response to expected Flow of money to firms is response to expected future profits; Flow of money from firms is future profits; Flow of money from firms is result of realized profitsresult of realized profits

Consumers, governments and Consumers, governments and international agents also have liability international agents also have liability structuresstructures


The key determinant of system The key determinant of system behavior is the level of profitsbehavior is the level of profits

FIHFIH incorporates the incorporates the KaleckianKaleckian view view of profits – structure of AD of profits – structure of AD determines profitsdetermines profits Simplest model, the aggregate level of Simplest model, the aggregate level of

profits equals the aggregate level of profits equals the aggregate level of investment each period (P/Y = I/Y).investment each period (P/Y = I/Y).

FIH is a theory of the impact of debt FIH is a theory of the impact of debt on system behavior.on system behavior.


Banks are innovative profit-seekersBanks are innovative profit-seekers Seek to innovate new profitable assets Seek to innovate new profitable assets

they acquire and liabilities they marketthey acquire and liabilities they market Three distinct income-debt relations Three distinct income-debt relations

for economic agentsfor economic agents Hedge-financingHedge-financing Speculative -financingSpeculative -financing Ponzi-financingPonzi-financing


Hedge finance: Hedge finance: agents which can agents which can fulfill all of their payment obligations fulfill all of their payment obligations from cash flowsfrom cash flows

Speculative finance: Speculative finance: agents which agents which can fulfill their payment obligations can fulfill their payment obligations from their income account, even from their income account, even though cash flow can not repay though cash flow can not repay principle on contractual debt (such principle on contractual debt (such units must “roll over” debt)units must “roll over” debt)


Ponzi finance: Ponzi finance: cash flows are not cash flows are not sufficient to fulfill either repayment sufficient to fulfill either repayment of principle or interest due on of principle or interest due on outstanding debt; such agents must outstanding debt; such agents must either sell assets or increase either sell assets or increase borrowingborrowing Borrowing or selling assets lowers the Borrowing or selling assets lowers the

equity of these agentsequity of these agents


First TheoremFirst Theorem ““The economy has financing regimes The economy has financing regimes

under which it is stable, and financing under which it is stable, and financing regimes under which it is unstable.” regimes under which it is unstable.”

If hedge-financing dominates, the economy If hedge-financing dominates, the economy is an equilibrium-seeking and containing is an equilibrium-seeking and containing system. The greater the weight of system. The greater the weight of speculative and Ponzi financing, the greater speculative and Ponzi financing, the greater the likelihood the economy is a deviation-the likelihood the economy is a deviation-amplifying system.amplifying system.

Source: Hyman Minsky, “The Financial Instability Hypothesis”, Handbook of Radical Political Economy, 1993.


Second TheoremSecond Theorem ““Over periods of prolonged prosperity, Over periods of prolonged prosperity,

the economy transits from financial the economy transits from financial relations that make for a stable system relations that make for a stable system to financial relations that make for an to financial relations that make for an unstable system.”unstable system.”

If an unstable economy occurs during a If an unstable economy occurs during a period of inflation, an attempt to reduce period of inflation, an attempt to reduce inflation via monetary constraint will push inflation via monetary constraint will push speculative units into Ponzi units and Ponzi speculative units into Ponzi units and Ponzi units will see their asset values collapse.units will see their asset values collapse.

Source: Hyman Minsky, “The Financial Instability Hypothesis”, Handbook of Radical Political Economy, 1993.

FIH: The Central QuestionFIH: The Central Question

Why does speculative Why does speculative and Ponzi financing and Ponzi financing

become more become more prevalent in times of prevalent in times of prolonged prosperity?prolonged prosperity?

Aggregate Demand TheoryAggregate Demand Theory Keynes’ General TheoryKeynes’ General Theory

Kaleckian alternativeKaleckian alternative Aggregate Supply FunctionAggregate Supply Function

Relationship of firms’ expected sales Relationship of firms’ expected sales receipts to level of employment hiredreceipts to level of employment hired

Aggregate Demand FunctionAggregate Demand Function Relationship of households’ expected Relationship of households’ expected

purchases to level of employmentpurchases to level of employment Interaction produces Macreconomic Interaction produces Macreconomic

equilibriumequilibrium

Aggregate Supply and Aggregate Supply and DemandDemand

Keynes Keynes viewed viewed Say’s Law as Say’s Law as requiring a requiring a coincidence coincidence between the between the Z and D Z and D functionsfunctions

Source: Paul Davidson, “Reviving Keynes’ Revolution,” Why Economists Disagree, p. 70.

Keynes and Say’s LawKeynes and Say’s Law Whether Keynes accurately portrayed Whether Keynes accurately portrayed

Say’s Law has been a subject of a Say’s Law has been a subject of a prolonged and ongoing debate.prolonged and ongoing debate.

Recall that Leijonhufvud argues that Recall that Leijonhufvud argues that what Say had in mind was a “constraint what Say had in mind was a “constraint on reasoning,” and that therefore Say’s on reasoning,” and that therefore Say’s Law is really a relationship between Law is really a relationship between plans and not the fruition of plans.plans and not the fruition of plans.

Davidson and Post-Keynesians accept Davidson and Post-Keynesians accept Keynes’ portrayal.Keynes’ portrayal.

Aggregate Supply and Aggregate Supply and DemandDemand

Keynes argued Keynes argued that involuntary that involuntary unemployment unemployment is due to a lack is due to a lack of effective of effective demand (Given demand (Given D at D’, D at D’, equilibrium equilibrium sales are E and sales are E and employment is employment is NN1 1 rather than rather than full full employment Nemployment Nff

Source: Paul Davidson, “Reviving Keynes’ Revolution,” Why Economists Disagree, p. 70.

‘

Aggregate Demand TheoryAggregate Demand Theory The primary determinant of the level of The primary determinant of the level of

effective demand is investment, which effective demand is investment, which does not require saving.does not require saving.

Rather investment only depends upon Rather investment only depends upon the willingness to borrow (tied to the willingness to borrow (tied to expected sales) and the willingness to expected sales) and the willingness to lend (tied to expected sales).lend (tied to expected sales).

Thus the importance of consumer Thus the importance of consumer demand in molding the expectations of demand in molding the expectations of firms and banks to enter into loan firms and banks to enter into loan contracts to finance investment.contracts to finance investment.

Normative Criteria and Normative Criteria and Policy EspousalPolicy Espousal

Success at full employment and Success at full employment and fair distribution of income rather fair distribution of income rather than success at allocating than success at allocating resourcesresources

Government ManagementGovernment Management Price and income policies can do goodPrice and income policies can do good Socialist to corporate liberalismSocialist to corporate liberalism

the post keynesians

Documents

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postkeynesian economists

keynesian conclusions

realinstitutions money

money matters

production of commodities

central fact

timeconsuming production