Transcript Diapositive 1

Challenging
Hegemony: On
varieties of
Keynesianism
Marc Lavoie
Target paper 2
• Robertson’s hare
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Duncan Foley’s Keynes
• «Levels of output, employment and income will vary
in response to shocks to aggregate demand».
• «…The resulting configuration of the economy [is] an
equilibrium, even when there is substantial
involuntary unemployment».
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Involuntary unemployment cannot be
proven to exist
• « Economic theorists, on the other hand, had difficulty in coming
to terms with Keynes’ characterization of economies with
substantial unemployment as equilibria » (Foley 2014, p. 8)
• Indeed….
• « The concept of involuntary unemployment can find no room in
the theoretical discourse » (De Vroey 2004).
• According to De Vroey, within the confines of neoclassical
theory, especially the neo-Walrasian branch, one cannot
demonstrate the existence of involuntary unemployment.
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Why then stick to neoclassical theory?
• Because of « the failure of alternative paradigms,
based on a more heterodox reading of the General
Theory »
• And because of « the impressive resilience of the
neoclassical apparatus and its capacity to tackle
issues that were earlier thought to be beyond its
grasp » (De Vroey 2004 again)
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Walrasian or heterodox?
• The radical perspective on Keynes is reduced to one page (four
paragraphs) out of 13 on the topic.
• Duncan Foley’s perspective on varieties of Keynesianism is
more Walrasian than heterodox.
• He distinguishes two interpretations of Keynes:
– the Bastard Keynesians, with sticky money wages or sticky
real wages, which also includes several New Keynesian
models;
– and the more fancy New Keynesian models based on a lack
of coordination, with uncorrected externalities (New
Keynesians of the third kind, in classifications that were
popular in the 1990s).
– But what about the New Consensus models of the 2000s,
where wages are fully flexible while prices are not?
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Walrasian perspectives
• The benchmark is the neo-Walrasian model with complete
markets and perfect information.
• The GT is reinterpreted as a big coordination problem,
associated with incomplete or asymetric information, liquidityconstrained decisions, externalities, and so on, where the lack
of fully flexible wages and prices are not necessarily at stake.
• The «reflexivity» of markets, à la Soros, is described as an
externality (in financial markets or when workers negotiate their
salaries relative to those of other trade unions).
• This all leads to the possibility of multiple equilibria
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Complexity economics, alias PostWalrasian economics
• « The difference between Walrasian and Post Walrasian
macroeconomics can be demonstrated in their alternative formal
specification of aggregate production functions….In Post
Walrasian work, the aggregate production function must be
modelled differently to allow direct consideration of alternative
levels of output due to non-market coordination failures and
multiple equilibria. The production function must allow the same
amount of capital and labour to be associated with different
levels of output. It must allow for shifts in aggregate output due
to demand spillover effects, externalities, coordination failure, or
whateve. » (Colander 1998).
• y = f (K, L, C)
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Aggregate demand or
aggregate supply?
• Colander (2001, p. 375), reminding us that he is a ‘Post Keynesian
fellow traveler’, has claimed that post-Keynesians were doing a
poor job at marketing their ideas. His advice at the time was that:
• « put bluntly, in today’s environment you can’t market the term
“effective demand” – you can market the term “effective supply”».
• What does that mean? According to Colander (2001, p. 380),
«expectations of demand become self-fulfilling», so the supply
decisions of firms are the key.
• Colander’s other suggestion has already been noted: add an extra
component to the standard production function – a coordination
component – which will affect expectations.
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The Great Recession caused by a lack of
coordination (but between who and who?)
• Imagine what post-Keynesian economics would look
like if post-Keynesians would have followed
Colander’s advice of 1998.
• The recession of 2001 and the Great Recession of
2008 would both be explained by:
– self-fulfilling expectations
– a lack of coordination
– negative shocks on effective supply
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The New Consensus: supply-led
• In the New Consensus (Real business cycles with
some New Keynesian content, DSGE model), a lower
real rate of interest speeds up the economy, as in the
Old Keynesian model.
• But the mechanism is different: it does not act
through the investment demand function. It acts
through the supply of labour.
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The New Consensus: supply-led II
• «A cut in interest rates makes consumption today relatively
more attractive than consumption tomorrow. Hence,
households will try to shift some of their lifetime
consumption towards the current period…. This increase in
consumption leads to excess demand. As firms try to hire
new workers to satisfy this demand, nominal wages
increase. As prices are (partly) sticky thanks to the Calvo
pricing, this additional consumption demand leads to an
increase in real wages and a compression of profits.
Higher real wages in turn lead the households to offer
more labour (substituting leisure for work) which in turn
leads to a new (higher employment) temporary equilibrium
in the labour market.» (Dullien, 2009)
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The liquidity trap
• Foley (p. 14) briefly discusses Keynes’s liquidity trap.
• His interpretation is similar to that of Krugman, but it is not
Keynes’s.
• In Krugman and Romer, and the New Consensus, the liquidity
trap is the zero-lower bound, due to the fact that the nominal
short-term rate of interest cannot fall any lower than zero,
whereas a negative nominal short-term rate would be needed
to achieve full employment. This is no different from Patinkin
(1948).
• In Keynes (1936), the nominal long-term rate of interest does
not fall any lower despite huge quantitative easing, because
bond prices are so high that investors fear that future capital
losses on long-term securities will wipe out their current interest
income. This is Keynes’s liquidity trap, associated with his
‘squares law’.
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Sticky wages vs sticky interest rates
• In the ‘good old’ Keynesian model, sticky wages stop
the Pigou effect or the real balance effect from
operating and achieving full employment.
• In the New Consensus model, full employment is
achieved through the reaction function of the central
bank; it is not automatic.
• Keynesian results are recovered when nominal
interest rates become rigid, at the zero-lower bound.
• So interest rates now provide the rigidity that was
provided by wages in the old Keynesian model and
by prices in the New Keynesian New Consensus
model.
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Romer’s Newest Consensus, with NAIRU
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Foley and the post-Keynesians I
• What is present
– Knightian radical uncertainty, fear of econometrics
(?)
– Rigid markups, rigid real wages
– Investment determines output and employment
– Deficit-financed fiscal policy tool
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Rigid markups
• « Since rigid markups are just as much anathema to
orthodox economic thinking as rigid money wages,
post-Keynesian economics has had litte purchase on
the high-theory struggles over ‘micro-foundations’ for
macroeconomics» (p. 16)
• Is that the only reason?
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Increasing returns: Lower real wages lead
to lower employment (Nell 1978)
w/p
LS
y
(w/p)fe
LDeffective
(w/p)1
a1/y
L1
a2/y
Lfe
L
Foley and the post-Keynesians II
• What is missing
– Sophisticated financial markets
– Lack of link between short-term and long-term
rates
– Interplay of central bank/financial institutions and
the supply of bank reserves
– Social coordination failures
• Is this really a fair assessment?
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The various PK strands: 5-way typology
• Fundamentalist or Financial Keynesians:
– Money, finance, liquidity preference, uncertainty, methodology
– Davidson, Minsky, Kregel, Chick, Dow, Fontana
• Kaleckians:
– Pricing, growth, cycles, employment, income distribution
– Sawyer, Bhaduri, Dutt, Blecker, Fazzari, L. Taylor
• Sraffians:
– Relative prices, technical choice, input-output models, capital theory
– Garegnani, Kurz, Pasinetti, Steedman
• Institutionalists:
– Institutions (firms, banks, central bank), pricing, behavioural economics
– Fred Lee, Peter Earl, Galbraith 2x, MMT (Wray)
• Kaldorians:
– Growth, money, international trade, productivity growth
– Godley, Thirlwall, McCombie, Palley, Setterfield
– Some authors go across the strands: Arestis, Nell….
UNAM 2014
Impact of the financial crisis
• The Great Recession will certainly have an impact on
the course of macroeconomics. The clearest sign of
this is the widespread admission that the loose
integration of finance into macroeconomic
models was a serious mistake (Eichenbaum 2010),
and the ensuing surge of work aiming to fill this gap.
At this juncture, it is, however, still difficult to gauge
whether a mere integration of the financial sector
within the existing framework will suffice, or
whether the Great Recession will trigger a more
radical reorientation of macroeconomics.
– (De Vroey and Malgrange 2011)
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A response to Foley’s target 2
paper? The Godley stock-flow
consistent (SFC) approach
• Perhaps a more appropriate name would
have been:
– Post-Keynesian stock-flow consistent
approach
– Real stock-flow monetary model
– Financial stock-flow coherent approach
– Sectoral stock-flow coherent approach
UMKC March 2014
A feature of SFC
• The Holy Grail of economics is the ability to
integrate the real economy with the financial
economy.
• The purpose is « to show how the whole system fits together
and cast banks in a realistic role » (Godley 1996).
UMKC March 2014
A critique of G&L by L. Taylor
•
In his review of Godley and Lavoie (2007), Lance Taylor (2008:
643-4) wonders whether the stock-flow consistent approach will
ever be able to handle the complexity and the innovations that
now characterize the financial system and the recent subprime
financial crisis.
• G&L assumed a single financial sector.
• One needs at least two financial sectors, perhaps made up of
banks and non-banks, or commercial banks and investment
banks, or banks and shadow banks (SPV, SIE), with
securitization, asset-backed commercial paper, mortgagebacked securities, etc.
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SFC MODELING
ISN’T ALWAYS EASY!
UMKC March 2014
Poszar et al. 2012
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Eatwell, Mouakil and Taylor (2008)
Households Firms
Inventories
Homes
Banks
SPV
Central
Bank
+ IN
∑
+ IN
+ ph.hh
+ Kh
Cash
+ HPMb
− HPM
0
Repos
−R
+R
0
Deposits
+ Dh
− Lf
Loans
Mortgages
−D
0
+L
0
− Mh
MBS
+M
0
+ ps.s
- ps.s
0
Net worth
− NWh
− NWf
− NWb
− NWg
0
−Kh − IN
∑
0
0
0
0
0
0
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By way of conclusion
• How about combining SFC with agent-based
modeling (without optimization)?
• Are the emerging properties of ABM simply the
counterpart of some straightforward macroeconomic
models? (e.g., Seppecher (2012) found that more
flexible wages lead to reduced employment relative
to more rigid wages, but this is because more flexible
wages lead to lower real wages in the downturn and
hence reduced aggregate demand).
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