Transcript Intermediate Macroeconomics - College Of Business and

The Post
Keynesians
Intermediate Macroeconomics
ECON-305 Spring 2013
Professor Dalton
Boise State University
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 (18991970)

Selected Essays on the
Dynamics of the
Capitalist Economy, 19331970 (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”
School
or
Tradition?
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
Paul Davidson



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”
Fundamentalist PK
 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-neutral- in 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
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)
Presuppositions of
Post-Keynesian
Macroeconomics
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
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
Monetary Theory

Endogenous Money
Supply of money determined by the
demand for bank credit and the public’s
preferences.
 Creation of loans and hence deposits is
ex nihilo – without previous reserves - all
that is needed is a credible borrower.
 Banks obtain cash and required reserves
from the central bank as a consequence
of loan-creation.

Monetary Theory
All money
(reserves, currency, deposits)
is endogenous
and demand-determined!
Monetary Theory


All interest rates are tied to the
“benchmark rate” that is administered
by the central bank.
The rate chosen by the central bank is
described by a reaction function,
specifying the policy goals the central
bank has.

e.g., raise interest rates when the
inflation is rising, unemployment falling,
capacity utilization is high.
Monetary Theory


At any given point
in time, the supply
of money is
perfectly elastic at
the benchmark
rate.
The demand for
money is
determined by the
loan rate of
interest, the
growth rate of
output, the growth
rate of prices and
the rate of
investment.
i
R
St2
St1
St0
D
High-powered Money
Financial Instability
Hypothesis


Focus on “capital development of
economy” rather than “allocation of
resources”
Capital development is accompanied
by exchanges of present money for
future money


“Present money” pays for resources into
production of investment output; “Future
money” is the profits accruing to capitalasset owning firms
Control over capital stock is financed by
liabilities
Financial Instability
Hypothesis

Liability Structures: the balance sheet of
firms determine a time-series of payment
commitments and time-series of
conjectured cash receipts



Money flows are from depositors to banks to
firms, and then from firms to banks to
depositors
Flow of money to firms is response to expected
future profits; Flow of money from firms is result
of realized profits
Consumers, governments and
international agents also have liability
structures
Financial Instability
Hypothesis


The key determinant of system
behavior is the level of profits
FIH incorporates the Kaleckian view of
profits – structure of AD determines
profits


Simplest model, the aggregate level of
profits equals the aggregate level of
investment each period (P/Y = I/Y).
FIH is a theory of the impact of debt
on system behavior.
Financial Instability
Hypothesis

Banks are innovative profit-seekers


Seek to innovate new profitable assets
they acquire and liabilities they market
Three distinct income-debt relations
for economic agents



Hedge-financing
Speculative -financing
Ponzi-financing
Financial Instability
Hypothesis


Hedge finance: agents which can fulfill
all of their payment obligations from
cash flows
Speculative finance: agents which can
fulfill their payment obligations from
their income account, even though
cash flow can not repay principle on
contractual debt (such units must “roll
over” debt)
Financial Instability
Hypothesis

Ponzi finance: cash flows are not
sufficient to fulfill either repayment of
principle or interest due on
outstanding debt; such agents must
either sell assets or increase
borrowing

Borrowing or selling assets lowers the
equity of these agents
Financial Instability
Hypothesis

First Theorem

“The economy has financing regimes
under which it is stable, and financing
regimes under which it is unstable.”
If hedge-financing dominates, the economy is
an equilibrium-seeking and containing
system. The greater the weight of speculative
and Ponzi financing, the greater the likelihood
the economy is a deviation-amplifying system.
Source: Hyman Minsky, “The Financial Instability Hypothesis”, Handbook of Radical Political Economy,
1993.
Financial Instability
Hypothesis

Second Theorem

“Over periods of prolonged prosperity,
the economy transits from financial
relations that make for a stable system to
financial relations that make for an
unstable system.”
If an unstable economy occurs during a
period of inflation, an attempt to reduce
inflation via monetary constraint will push
speculative units into Ponzi units and Ponzi
units will see their asset values collapse.
Source: Hyman Minsky, “The Financial Instability Hypothesis”, Handbook of Radical Political Economy,
1993.
FIH: The Central Question
Why does speculative
and Ponzi financing
become more
prevalent in times of
prolonged prosperity?
Aggregate Demand Theory

Keynes’ General Theory


Aggregate Supply Function


Relationship of firms’ expected sales
receipts to level of employment hired
Aggregate Demand Function


Kaleckian alternative
Relationship of households’ expected
purchases to level of employment
Interaction produces Macreconomic
equilibrium
Aggregate Supply and Demand

Keynes
viewed Say’s
Law as
requiring a
coincidence
between the
Z and D
functions
Source: Paul Davidson, “Reviving Keynes’ Revolution,” Why Economists Disagree, p. 70.
Keynes and Say’s Law



Whether Keynes accurately portrayed
Say’s Law has been a subject of a
prolonged and ongoing debate.
Recall that Leijonhufvud argues that
what Say had in mind was a
“constraint on reasoning,” and that
therefore Say’s Law is really a
relationship between plans and not
the fruition of plans.
Davidson and Post-Keynesians accept
Keynes’ portrayal.
Aggregate Supply and Demand

Keynes argued
that involuntary
unemployment
is due to a lack
of effective
demand (Given
D at D’,
equilibrium
sales are E and
employment is
N1 rather than
full employment
Nf
Source: Paul Davidson, “Reviving Keynes’ Revolution,” Why Economists Disagree, p. 70.
‘
Aggregate Demand Theory



The primary determinant of the level
of effective demand is investment,
which does not require saving.
Rather investment only depends upon
the willingness to borrow (tied to
expected sales) and the willingness to
lend (tied to expected sales).
Thus the importance of consumer
demand in molding the expectations
of firms and banks to enter into loan
contracts to finance investment.
Normative Criteria and Policy
Espousal
Success at full employment and
fair distribution of income rather
than success at allocating
resources
 Government Management



Price and income policies can do good
Socialist to corporate liberalism