Post-Keynesian
Economics - I
D. Allen Dalton
ECON 325 – Radical Economics
Boise State University
Fall 2011
Origins
and
Development
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
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
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”
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
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”
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
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”
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)
School
or
Tradition?
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-neutralin 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
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
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
Methodology
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)
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)
Critique of Orthodox Method
• Lawson’s article relevant to all
heterodox schools of thought
• Nature of Contemporary Economics
– Three essential features
(1) Conception of science as explaining
regularities
(2) Related conception of human agents as
essentially passive responders to
knowledge stimuli
(3) Reluctance to engage methodological
questions
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
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)
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
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)
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
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.
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
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)
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?
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.
Relationship to Post-Keynesianism
• The generalized shared themes of PostKeynesianism 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.
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
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
Presuppositions of
Post-Keynesian
Macroeconomics
Relationship between Traditions
Marc Lavoie, Introduction to Post-Keynesian Economics
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
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
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
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
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
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.”
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.”
Essential Characteristics
(1) 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
Auxiliary Features
(1) Inefficacy of Flexible Prices
•
Strong income effects make flexible prices counterproductive
(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
Strands of Post-Keynesianism
Fundamentalists
Sraffian
Kaleckian
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
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
Kaleckians
• Emphasis
– Role and Realization of Profits
– Microeconomics, especially product
pricing and firm behavior
– Kalecki, Marx, Kaldor, Robinson