HETERODOX
MACROECONOMICS:
AN OVERVIEW
Malcolm Sawyer
University of Leeds
Introduction
• Heterodox macroeconomics includes what may be termed Post•
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Keynesian and Kaleckian macroeconomics
Reading:
M. Sawyer, ‘The central core of heterodox macroeconomics’ in J.
Goldstein and M. Hillard (eds), Heterodox Macroeconomics: Keynes,
Marx and globalization, London: Routledge
E. Hein and E. Stockhammer (eds.), A Modern Guide to Keynesian
Macroeconomics and Economic Policies (Edward Elgar)
J.E. King (ed.) The Elgar Companion to Post Keynesian Economics,
Edward Elgar, 2012 has around 100 entries on post Keynesian
economics; particularly entries on business cycles, circuit theory,
effective demand, inflation, investment, Kaleckian economics,
microfoundations, uncertainty
G.C. Harcourt and P. Kriesler (eds.) The Oxford Handbook of PostKeynesian Economics, volumes 1 and 2, Oxford University Press, is a
two volume coverage of post-Keynesian economics, particularly chapters
on Money, Kaleckian Economics (in volume 1), uncertainty (in volume 2):
each of the volumes contains an extensive introduction by the editors
(same introduction in each volume)
Key elements
• It is macroeconomics!
• Microeconomic behaviour – but not based
on utility maximisation
• Fundamental uncertainty and path
dependency
• Role of money in a monetary production
economy
Key elements
• Demand-driven economy, with investment
as key component of demand
• Supply constraints and inflation barriers: a
structuralist view
• Income distribution (wages: profits)
important
Macroeconomics
• ‘not “macro-economic” in the sense of representing a first
simplified rough step towards a more detailed and
disaggregated analysis. … Only problems have been
discussed which are of a macro-economic nature; an
accurate investigation of them has nothing to do with
disaggregation. They would remain the same – i.e. they
would still arise at a macro-economic level – even if we
were to break down the model into a disaggregated
analysis’ (Pasinetti, 1974)
Microeconomic behaviour
• There is no single dominant view on behaviour and
decision-making in heterodox macroeconomics akin to
optimisation subject to constraints in mainstream
economics
• Firms’ decisions depend on who is in effective control
(managers, owners) and the structure and nature of
competition: in macroeconomics the key decisions relate
to investment and to pricing
• Household consumption decisions: importance of social
norms and pressures
• Labour supply decisions: the imperative to work
Uncertainty and risk
• Mainstream macroeconomics based on RARE –
representative agent, rational expectations
• A situation of risk: where the outcome of decision/action
can be represented in terms of a probability distribution:
the equivalent of rolling a dice
• A situation of (fundamental) uncertainty where the
outcomes are unknown and/or unknowable.
Fundamental uncertainty and path dependency
• "By, uncertain knowledge, let me explain, I do not mean merely to
distinguish what is known for certain what is only probable. The game
of roulette is not subject, in this sense, to uncertainty; nor is the
prospect of a Victory bond being drawn. Or, again, the expectation of
life is only slightly uncertain. Even the weather is only moderately
uncertain. The sense in which I am using the term is that in which the
prospect of a European war is uncertain, or the price of copper and
the rate of interest twenty years hence, or the obsolescence of a new
invention, or the position of private wealth owners in the social system
in 1970. About these matters there is no scientific basis on which to
form any calculable probability whatever. We simply do not know.
Nevertheless, the necessity for action and for decision compels us as
practical men to do our best to overlook this awkward fact and to
behave exactly as we should if we had behind us a good Benthamite
calculation of a series of prospective advantages and disadvantages,
each multiplied by its appropriate probability, waiting to be summed."
(Keynes, 1937, pp. 213-214).
Fundamental uncertainty and path dependency
• Fundamental uncertainty affects:
• How human behaviour is approached; what are the
coping mechanisms for dealing with uncertainty;
• Path dependency – the future is yet to be formed;
Nature of money
• Money is credit money, created by banking system
(including central bank) through loan processes;
• The possession of money is required prior to spending:
the ‘finance motive’ for holding money;
• The provision of loans by the banking system is highly
significant element in the financing of investment and
production, and in the generation of instabilities (‘financial
fragility’).
Demand-driven economy
• The level of effective demand as the determinant of the
level of economic activity – in both the short-run and the
long-run
• Investment as a driver of effective demand.
• Investment as volatile and a generator of cyclical
fluctuations
Supply constraints/structuralist
• Full employment of labour is rarely achieved, and supply
constraints in terms of lack of productive capacity and its
location.
• Inflation barriers arising from lack of productive capacity
A simple illustrative demand side model
• Investment:
• Undertaken by firms in pursuit of growth and profits; has
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to be financed; optimising calculations not possible
Represent here by:
I = a + bY + cP
(a ‘animal spirits’; Y output; P profits)
Then I = a + bY + cmY (where m = P/Y)
A simple illustrative demand side model
• Savings:
• Wages and profits have different roles and functions
• Differential savings out of wages and profits
• S = swW + spP (W: wages),
• Then S = sw(Y - P) + spP = (sp – sw)P + swY =
• [(sp - sw)m + sw] Y
A simple illustrative model
• Savings = Investment condition would give:
• Y[(sp – sw)m + sw –b – cm] = a
• Notice the role of m (profit share): the impact of rise in m
can be positive on output (‘profit led’) or negative (‘wage
led’).
• No reason to think that the level of output which would
result from this would be consistent with full employment
• Introduce budget deficit
A simple illustrative model
• Now amend for government activity: the revised
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relationship becomes:
Savings - Investment = Budget Deficit
Put budget deficit = d
Y[(sp – sw)m + sw –b – cm] = a + d
The need for budget deficits to absorb the gap between
savings and investment