Post-Keynesian economics

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Post-Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, with subsequent development influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney Weintraub, Paul Davidson, Piero Sraffa and Jan Kregel. Historian Robert Skidelsky argues that the post-Keynesian school has remained closest to the spirit of Keynes' original work. [1] [2] It is a heterodox approach to economics. [3] [4]

In the history of economic thought, a school of economic thought is a group of economic thinkers who share or shared a common perspective on the way economies work. While economists do not always fit into particular schools, particularly in modern times, classifying economists into schools of thought is common. Economic thought may be roughly divided into three phases: premodern, early modern and modern. Systematic economic theory has been developed mainly since the beginning of what is termed the modern era.

<i>The General Theory of Employment, Interest and Money</i> book by John Maynard Keynes

The General Theory of Employment, Interest and Money of 1936 is the last and most important book by the English economist John Maynard Keynes. It created a profound shift in economic thought, giving macroeconomics a central place in economic theory and contributing much of its terminology – the "Keynesian Revolution". It had equally powerful consequences in economic policy, being interpreted as providing theoretical support for government spending in general, and for budgetary deficits, monetary intervention and counter-cyclical policies in particular. It is pervaded with an air of mistrust for the rationality of free-market decision making.

John Maynard Keynes English economist

John Maynard Keynes, 1st Baron Keynes, was a British economist, trained mathematician, whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. He built on and greatly refined earlier work on the causes of business cycles, and was one of the most influential economists of the 20th century. Widely considered the founder of modern macroeconomics, his ideas are the basis for the school of thought known as Keynesian economics, and its various offshoots.

Contents

Introduction

The term "post-Keynesian" was first used to refer to a distinct school of economic thought by Eichner and Kregel (1975) [5] and by the establishment of the Journal of Post Keynesian Economics in 1978. Prior to 1975, and occasionally in more recent work, post-Keynesian could simply mean economics carried out after 1936, the date of Keynes's General Theory. [6]

Alfred S. Eichner was an American post-Keynesian economist who challenged the neoclassical price mechanism and asserted that prices are not set through supply and demand but rather through mark-up pricing.

Post-Keynesian economists are united in maintaining that Keynes' theory is seriously misrepresented by the two other principal Keynesian schools: neo-Keynesian economics, which was orthodox in the 1950s and 60s, and new Keynesian economics, which together with various strands of neoclassical economics has been dominant in mainstream macroeconomics since the 1980s. Post-Keynesian economics can be seen as an attempt to rebuild economic theory in the light of Keynes' ideas and insights. However, even in the early years, post-Keynesians such as Joan Robinson sought to distance themselves from Keynes and much current post-Keynesian thought cannot be found in Keynes. Some post-Keynesians took a more progressive view than Keynes himself, with greater emphases on worker-friendly policies and redistribution. Robinson, Paul Davidson and Hyman Minsky emphasized the effects on the economy of practical differences between different types of investments, in contrast to Keynes' more abstract treatment. [7]

Neo-Keynesian economics is a school of macroeconomic thought that was developed in the post-war period from the writings of John Maynard Keynes. A group of economists, attempted to interpret and formalize Keynes' writings and to synthesize it with the neo-classical models of economics. Their work has become known as the neo-classical synthesis and created the models that formed the core ideas of neo-Keynesian economics. These ideas dominated mainstream economics in the post-war period and formed the mainstream of macroeconomic thought in the 1950s, 1960s and 1970s.

New Keynesian economics is a school of contemporary macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of new classical macroeconomics.

Neoclassical economics is an approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand. This determination is often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production, in accordance with rational choice theory, a theory that has come under considerable question in recent years.

The theoretical foundation of post-Keynesian economics is the principle of effective demand, that demand matters in the long as well as the short run, so that a competitive market economy has no natural or automatic tendency towards full employment. [8] Contrary to the views of new Keynesian economists working in the neoclassical tradition, post-Keynesians do not accept that the theoretical basis of the market's failure to provide full employment is rigid or sticky prices or wages. Post-Keynesians typically reject the IS–LM model of John Hicks, which is very influential in neo-Keynesian economics.[ citation needed ]

In economics, effective demand (ED) in a market is the demand for a product or service which occurs when purchasers are constrained in a different market. It contrasts with notional demand, which is the demand that occurs when purchasers are not constrained in any other market. In the aggregated market for goods in general, demand, notional or effective, is referred to as aggregate demand. The concept of effective supply parallels the concept of effective demand. The concept of effective demand or supply becomes relevant when markets do not continuously maintain equilibrium prices.

Full employment is a situation in which everyone who wants a job can have work hours they need on fair wages. Because people switch jobs, full employment involves a positive stable rate of unemployment. An economy with full employment might still have underemployment where part-time workers cannot find jobs appropriate to their skill level. In macroeconomics, full employment is sometimes defined as the level of employment at which there is no cyclical or deficient-demand unemployment.

IS–LM model Keynesian macroeconomic model about interest rates and assets markets that places general equilibrium (simultaneous equilibria in goods/asset markets) at the intersection of “investment–saving” (IS) and “liquidity preference–money supply” (LM)

The IS–LM model, or Hicks–Hansen model, is a macroeconomic tool that shows the relationship between interest rates (ordinate) and assets market. The intersection of the "investment–saving" (IS) and "liquidity preference–money supply" (LM) curves models "general equilibrium" where supposed simultaneous equilibria occur in both the goods and the asset markets. Yet two equivalent interpretations are possible: first, the IS–LM model explains changes in national income when price level is fixed short-run; second, the IS–LM model shows why an aggregate demand curve can shift. Hence, this tool is sometimes used not only to analyse economic fluctuations but also to suggest potential levels for appropriate stabilisation policies.

The contribution of post-Keynesian economics [9] has extended beyond the theory of aggregate employment to theories of income distribution, growth, trade and development in which money demand plays a key role, whereas in neoclassical economics these are determined by the forces of technology, preferences and endowment. In the field of monetary theory, post-Keynesian economists were among the first to emphasise that money supply responds to the demand for bank credit, [10] so that a central bank cannot control the quantity of money, but only manage the interest rate by managing the quantity of monetary reserves.

Central bank public institution that manages a states currency, money supply, and interest rates

A central bank, reserve bank, or monetary authority is an institution that manages the currency, money supply, and interest rates of a state or formal monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, and also generally controls the printing/coining of the national currency, which serves as the state's legal tender. A central bank also acts as a lender of last resort to the banking sector during times of financial crisis. Most central banks also have supervisory and regulatory powers to ensure the solvency of member institutions, to prevent bank runs, and to discourage reckless or fraudulent behavior by member banks.

This view has largely been incorporated into monetary policy,[ citation needed ] which now targets the interest rate as an instrument, rather than the quantity of money. In the field of finance, Hyman Minsky put forward a theory of financial crisis based on financial fragility, which has received renewed attention. [11] [12]

Monetary policy subclass of the economic policy

Monetary policy is the policy adopted by the monetary authority of a country that controls either the interest rate payable on very short-term borrowing or the money supply, often targeting inflation or the interest rate to ensure price stability and general trust in the currency.

Financial Fragility is the vulnerability of a financial system to a financial crisis. Franklin Allen and Douglas Gale define financial fragility as the degree to which "...small shocks have disproportionately large effects." Roger Lagunoff and Stacey Schreft write, "In macroeconomics, the term "financial fragility" is used...to refer to a financial system's susceptibility to large-scale financial crises caused by small, routine economic shocks."

Strands

There are a number of strands to post-Keynesian theory with different emphases. Joan Robinson regarded Michał Kalecki’s theory of effective demand to be superior to Keynes’ theories. Kalecki's theory is based on a class division between workers and capitalists and imperfect competition. [13] Robinson also led the critique of the use of aggregate production functions based on homogeneous capital – the Cambridge capital controversy – winning the argument but not the battle. [14] The writings of Piero Sraffa were a significant influence on the post-Keynesian position in this debate, though Sraffa and his neo-Ricardian followers drew more inspiration from David Ricardo than Keynes. Much of Nicholas Kaldor’s work was based on the ideas of increasing returns to scale, path dependency, and the key differences between the primary and industrial sectors. [15]

Paul Davidson [16] follows Keynes closely in placing time and uncertainty at the centre of theory, from which flow the nature of money and of a monetary economy. Monetary circuit theory, originally developed in continental Europe, places particular emphasis on the distinctive role of money as means of payment. Each of these strands continues to see further development by later generations of economists.

Modern Monetary Theory is a relatively recent offshoot influenced by the macroeconomic modelling of Wynne Godley and Hyman Minsky's ideas on the labour market, as well as chartalism and functional finance.

Current work

Journals

Much post-Keynesian research is published in the Review of Keynesian Economics (ROKE), the Journal of Post Keynesian Economics (founded by Sidney Weintraub and Paul Davidson), the Cambridge Journal of Economics, the Review of Political Economy, and the Journal of Economic Issues (JEI).

United Kingdom

There is also a United Kingdom academic association, the Post Keynesian Economics Society (PKES). This was previously called the Post Keynesian Economics Study Group (PKSG) but changed its name in 2018.

United States

In the United States, there are several universities with a post-Keynesian bent:

Canada

In Canada, post-Keynesians can be found at the University of Ottawa and Laurentian University.

Germany

In Germany, post-Keynesianism is very strong at the Berlin School of Economics and Law [17] and its master's degree course: International Economics [M.A.]. Many German Post-Keynesians are organized in the Forum Macroeconomics and Macroeconomic Policies. [18]

Australia

University of Newcastle

The University of Newcastle in New South Wales, Australia, houses the Centre of Full Employment and Equity (CofFEE), an active educational, research and collaborative organisation whose focus is on policies "restoring full employment" and achieving an economy that delivers "equitable outcomes for all". CofFEE's work is on post-Keynesian macroeconomics, labour economics, regional development and monetary economics. Research conducted by CofFEE is aimed at developing a model for new global economy that achieves full employment without the consequences imposed by the dominant neoliberal economic policies.

Major post-Keynesian economists

Major post-Keynesian economists of the first and second generations after Keynes include:

See also

Notes

  1. Skidelsky 2009 , p. 42
  2. Financial markets, money and the real world, by Paul Davidson, pp. 88–89
  3. Lavoie, Marc (2006), "Post-Keynesian Heterodoxy", Introduction to Post-Keynesian Economics, Palgrave Macmillan UK, pp. 1–24, doi:10.1057/9780230626300_1, ISBN   9781349283378
  4. Dequech, David (2012). "Post Keynesianism, Heterodoxy and Mainstream Economics". Review of Political Economy. 24 (2): 353–368. doi:10.1080/09538259.2012.664364. ISSN   0953-8259.
  5. Eichner and Kregel 1975
  6. King 2002 , p. 10
  7. Hayes 2008 [ page needed ]
  8. Arestis 1996
  9. For a general introduction see Holt 2001
  10. Kaldor 1980
  11. Palley, Thomas (April 2010). "The Limits of Minsky's Financial Instability Hypothesis as an Explanation of the Crisis". Monthly Review. 61.
  12. Minsky 1975 [ page needed ]
  13. Robinson 1974
  14. Pasinetti 2007
  15. Harcourt 2006, Pasinetti 2007
  16. Davidson 2007
  17. "HWR Berlin - Campus4U". campus4u.hwr-berlin.de.
  18. Hein, Eckhard; Priewe, Jan (2009). "Forum: The Research Network Macroeconomics and Macroeconomic Policies (FMM) – Past, present and future". European Journal of Economics and Economic Policies: Intervention. 6 (2): 166–173. doi:10.4337/ejeep.2009.02.04.

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Jan A. Kregel is an eminent post-Keynesian economist.

Michał Kalecki Polish economist

Michał Kalecki was a Polish economist. Over the course of his life, Kalecki worked at the London School of Economics, University of Cambridge, University of Oxford and Warsaw School of Economics and was an economic advisor to the governments of Poland, France, Cuba, Israel, Mexico and India. He also served as the deputy director of the United Nations Economic Department in New York City.

Hyman Minsky American economist

Hyman Philip Minsky was an American economist, a professor of economics at Washington University in St. Louis, and a distinguished scholar at the Levy Economics Institute of Bard College. His research attempted to provide an understanding and explanation of the characteristics of financial crises, which he attributed to swings in a potentially fragile financial system. Minsky is sometimes described as a post-Keynesian economist because, in the Keynesian tradition, he supported some government intervention in financial markets, opposed some of the financial deregulation policies popular in the 1980s, stressed the importance of the Federal Reserve as a lender of last resort and argued against the over-accumulation of private debt in the financial markets.

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Paul Davidson is an American macroeconomist who has been one of the leading spokesmen of the American branch of the post-Keynesian school in economics. He is a prolific writer and has actively intervened in important debates on economic policy from a position that is very critical of mainstream economics.

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Luigi Pasinetti Italian economist

Luigi L. Pasinetti is an Italian economist of the post-Keynesian school. Pasinetti is considered the heir of the "Cambridge Keynesians" and a student of Piero Sraffa and Richard Kahn. Along with them, as well as Joan Robinson, he was one of the prominent members on the "Cambridge, UK" side of the Cambridge capital controversy. His contributions to economics include developing the analytical foundations of neo-Ricardian economics, including the theory of value and distribution, as well as work in the line of Kaldorian theory of growth and income distribution. He has also developed the theory of structural change and economic growth, structural economic dynamics and uneven sectoral development.

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History of macroeconomic thought

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Athanasios "Tom" Asimakopulos was a Canadian economist, who was the "William Dow Professor of Political Economy" in the Department of Economics, McGill University, Montreal, Quebec, Canada. His monograph, Keynes's General Theory and Accumulation, reviews important areas of Keynes's General Theory and the theories of accumulation of two of his most distinguished followers, Roy Harrod and Joan Robinson.

Thomas Palley is an American economist who has served as the chief economist for the US–China Economic and Security Review Commission. He is currently Schwartz Economic Growth Fellow at the New America Foundation.

Basil John Moore was a Canadian post-Keynesian economist, best known for developing and promoting endogenous money theory, particularly the proposition that the money supply curve is horizontal, rather than upward sloping, a proposition known as horizontalism. He was the most vocal proponent of this theory, and is considered a central figure in post Keynesian economics

Victoria Chick is a Post Keynesian economist who is best known for her contributions to the understanding of Keynes's General Theory and to the establishment of Post Keynesian economics in the UK and elsewhere.

L. Randall Wray American economist associated with Modern Monetary Theory

Larry Randall Wray is a professor of Economics at Bard College and Senior Scholar at the Levy Economics Institute. Previously, he was a professor at the University of Missouri–Kansas City in Kansas City, Missouri, USA, whose faculty he joined in August 1999. Before UMKC, he served as a visiting professor at the University of Rome, Italy, the University of Paris, France, and the UNAM, in Mexico City. From 1994 to 1995 he was a Fulbright Scholar at the University of Bologna. From 2015 he is a Visiting professor at the University of Bergamo.

References

Further reading