Jakob Kapeller University Duisburg-Essen & Johannes Kepler University Linz

Chair for Socioeconomics

www.jakob-kapeller.org | www.icae.at | www.heterodoxnews.com

Galway, 14-16 March 2017

Pluralist and heterodox economics: Conceptual clarification and exemplary applications

Jakob Kapeller

Agenda

• Pluralist economics? • Three major reasons / motivations for pluralism in economics

• Heterodox economics? • The emergence of heterodox economics

• Pure opposition or coherent research program?

• Mainstream, Heterodoxy and Pluralism

• Pluralist heterodoxy: Exemplary applications • Operationalizing pluralism

• ‚Integration’: Minsky-Veblen Cycles as a pluralist take on the crisis

• ‚Diversification‘: A peek on European Disintegration

2

pluralist economics?

Jakob Kapeller

“Popper, Objective Knowledge, p. 266

Whenever a theory appears to you as the only possible one, take this as a sign that you have neither understood the theory nor the problem which it was intended to solve.

pluralism, fallibilism and the certainty of knowledge

4

Jakob Kapeller

“Albert (1991): Treatise on critical reason,Translation JK

all certainties of knowledge are manufactured and, as such, worthless for the assessment of reality“

pluralism, fallibilism and the certainty of knowledge

5

Jakob Kapeller

“Robbins (1932): An Essay on the Nature and Significance of Economic Science, p. 1

The efforts of economists during the last hundred and fifty years have resulted in the establishment of a body of generalisations whose substantial accuracy and importance are open to question only by the ignorant or the perverse.“

pluralism, fallibilism and the certainty of knowledge: economics as counterfactual case?

6

Jakob Kapeller

“Kurt W. Rothschild (1999): To Push and to be Pushed, 5

[A] plurality of paradigms in economics and in social sciences in general is not only an obvious fact but also a necessary and desirable phenomenon in a very complex and continually changing subject.“

pluralism and the complexity of social phenomena

7

Jakob Kapeller

pluralism and the complexity of social phenomena

• The empirical justification: reality is messy and diverse.

• Social phenomena are multifaceted, diverse and constantly changing, which allows or

even affords taking a variety of perspectives on a given subject.

• Different theories are possible more like maps for diverse tasks (driving a car, navigating

a ship, hiking...), i.e. serving different purposes (Giere 1999)

• Why ‚reality is messy?‘ — different angles on problem + low power of tests to weed out

true theories

8

Jakob Kapeller

pluralism and the complexity of social phenomena

• The empirical justification: reality is messy and diverse.

• Social phenomena are multifaceted, diverse and constantly changing, which allows or

even affords taking a variety of perspectives on a given subject.

• Different theories are possible more like maps for diverse tasks (driving a car, navigating

a ship, hiking...), i.e. serving different purposes (Giere 1999)

• Why ‚reality is messy?‘ — different angles on problem + low power of tests to weed out

true theories

8

Jakob Kapeller

pluralism and the complexity of social phenomena

• The empirical justification: reality is messy and diverse.

• Social phenomena are multifaceted, diverse and constantly changing, which allows or

even affords taking a variety of perspectives on a given subject.

• Different theories are possible more like maps for diverse tasks (driving a car, navigating

a ship, hiking...), i.e. serving different purposes (Giere 1999)

• Why ‚reality is messy?‘ — different angles on problem + low power of tests to weed out

true theories

8

• Different Theories are then not necessarily

always antagonistic, but may also be

complementary or neutral to each other.

Jakob Kapeller9

P

Jakob Kapeller9

P

Jakob Kapeller9

P

Jakob Kapeller9

P

Increase in Economic Inequality

Jakob Kapeller9

P

Increase in Economic Inequality

Tax Policy: decrease of top marginal tax rates

Jakob Kapeller9

P

Increase in Economic Inequality

Tax Policy: decrease of top marginal tax rates

Globalization: more freedom for capital-flows

Jakob Kapeller9

P

Increase in Economic Inequality

Tax Policy: decrease of top marginal tax rates

Globalization: more freedom for capital-flows

Power: weaker unions

Jakob Kapeller9

P

Increase in Economic Inequality

Tax Policy: decrease of top marginal tax rates

Globalization: more freedom for capital-flows

Power: weaker unions

Technological Change: returns on human capital

Jakob Kapeller9

P

Increase in Economic Inequality

Tax Policy: decrease of top marginal tax rates

Globalization: more freedom for capital-flows

Power: weaker unions

Technological Change: returns on human capital

Increasing Hierarchy in Labour Markets: working poor vs.

manager bonus

Jakob Kapeller9

P

Increase in Economic Inequality

Tax Policy: decrease of top marginal tax rates

Globalization: more freedom for capital-flows

Power: weaker unions

Technological Change: returns on human capital

Increasing Hierarchy in Labour Markets: working poor vs.

manager bonus

Macroeconomics: decrease in demand

Jakob Kapeller9

P

Increase in Economic Inequality

Tax Policy: decrease of top marginal tax rates

Globalization: more freedom for capital-flows

Power: weaker unions

Technological Change: returns on human capital

Increasing Hierarchy in Labour Markets: working poor vs.

manager bonus

Macroeconomics: decrease in demand

Health: more poverty - worse state of health

Jakob Kapeller9

P

Increase in Economic Inequality

Tax Policy: decrease of top marginal tax rates

Globalization: more freedom for capital-flows

Power: weaker unions

Technological Change: returns on human capital

Increasing Hierarchy in Labour Markets: working poor vs.

manager bonus

Macroeconomics: decrease in demand

Health: more poverty - worse state of health

Politics: more power for business elites.

Jakob Kapeller9

P

Increase in Economic Inequality

Tax Policy: decrease of top marginal tax rates

Globalization: more freedom for capital-flows

Power: weaker unions

Technological Change: returns on human capital

Increasing Hierarchy in Labour Markets: working poor vs.

manager bonus

Macroeconomics: decrease in demand

Health: more poverty - worse state of health

Politics: more power for business elites.

Happiness: decrease or stagnation in

spite of growth

Jakob Kapeller9

P

Increase in Economic Inequality

Tax Policy: decrease of top marginal tax rates

Globalization: more freedom for capital-flows

Power: weaker unions

Technological Change: returns on human capital

Increasing Hierarchy in Labour Markets: working poor vs.

manager bonus

Macroeconomics: decrease in demand

Health: more poverty - worse state of health

Politics: more power for business elites.

Happiness: decrease or stagnation in

spite of growth

Financial markets: increase in speculation and

bad loans

Jakob Kapeller9

P

Increase in Economic Inequality

Tax Policy: decrease of top marginal tax rates

Globalization: more freedom for capital-flows

Power: weaker unions

Technological Change: returns on human capital

Increasing Hierarchy in Labour Markets: working poor vs.

manager bonus

Macroeconomics: decrease in demand

Health: more poverty - worse state of health

Politics: more power for business elites.

Happiness: decrease or stagnation in

spite of growth

Financial markets: increase in speculation and

bad loans

Keynes

Jakob Kapeller9

P

Increase in Economic Inequality

Tax Policy: decrease of top marginal tax rates

Globalization: more freedom for capital-flows

Power: weaker unions

Technological Change: returns on human capital

Increasing Hierarchy in Labour Markets: working poor vs.

manager bonus

Macroeconomics: decrease in demand

Health: more poverty - worse state of health

Politics: more power for business elites.

Happiness: decrease or stagnation in

spite of growth

Financial markets: increase in speculation and

bad loans

Keynes

Evolutionary Economics

Jakob Kapeller9

P

Increase in Economic Inequality

Tax Policy: decrease of top marginal tax rates

Globalization: more freedom for capital-flows

Power: weaker unions

Technological Change: returns on human capital

Increasing Hierarchy in Labour Markets: working poor vs.

manager bonus

Macroeconomics: decrease in demand

Health: more poverty - worse state of health

Politics: more power for business elites.

Happiness: decrease or stagnation in

spite of growth

Financial markets: increase in speculation and

bad loans

Keynes

Evolutionary Economics

Neoclassical

Jakob Kapeller

“Albert 1991, 61, translation JK

…monism of theories [...] can easily have the consequence of using facts only for the illustration or backup of the predominant theory, and interpreting them in a compliant way.”

pluralism, openness and the appraisal of theories

10

Jakob Kapeller

Does science need pluralism?

• Three major reason for pluralism in science and economics:

• (1) Fallibilism: As there is no certainty a perfect theory, which can never be improved or

replaced by a superior alternative, can never be found. Diversity in ideas is crucial for

avoiding dogmatism.

• (2) Social phenomena are complex and multi-faceted, which might require a diversity

of perspectives to adequately understand and address a given problem or phenomenon.

Theories are only „partial theories“ (Rothschild).

• (3) Practical requirements in theory-appraisal: openness vs. prejudice in theory-testing.

Without theoretical alternatives falsification is impossible (as falsification requires the

corroboration of an alternative theory - no falsification without alternative!)

11

heterodox economics a short history

Jakob Kapeller

Paradigms in economics: a rough view

13

Dobusch, Leonhard und Kapeller, Jakob: „Heterodox United vs. Mainstream City? - Sketching a Framework for Interested Pluralism in Economics“ Journal of Economic Issues, 46(4): 1035-1057.

Jakob Kapeller

“Paul Davidson’s personal recollection of one reviewer of a failed NSF grant in 1980; cited according to King (2003, 134)

It is true that Davidson has a very good track record and surprisingly good publications, but he marches to a different drummer. If he is marching to a different drummer, if his music is different, then he ought to get his own money and not use ours.“

Path-dependent paradigmatic patterns in economics

14

Jakob Kapeller

Path-dependent paradigmatic patterns in economics

15

Jakob Kapeller

Path-dependent paradigmatic patterns in economics

15

Journal of Economic Issues, 1969

Jakob Kapeller

Path-dependent paradigmatic patterns in economics

15

Journal of Economic Issues, 1969

Review of Radical Political Economics, 1969

Jakob Kapeller

Path-dependent paradigmatic patterns in economics

15

Journal of Economic Issues, 1969

Review of Radical Political Economics, 1969

Cambridge Journal of Economics, 1977

Jakob Kapeller

Path-dependent paradigmatic patterns in economics

15

Journal of Economic Issues, 1969

Review of Radical Political Economics, 1969

Cambridge Journal of Economics, 1977

Journal of Post-Keynesian Economics, 1978

Jakob Kapeller

Path-dependent paradigmatic patterns in economics

15

Journal of Economic Issues, 1969

Review of Radical Political Economics, 1969

Cambridge Journal of Economics, 1977

Journal of Post-Keynesian Economics, 1978

Ecological Economics, 1989

Jakob Kapeller

“

Rothschild (2008), Apropos Keynesianer, 25,Translation JK

The confrontation heterodoxy vs. mainstreams emerges from the current state of contemporary economics, which is characterized by a strong preference for neoclassical approaches and assumptions. Such a research orientation is fostered by economic teaching and plays a decisive role for career-prospects in academia. This lopsidedness affects all non-neoclassical and critical approaches, which explains and justifies the emergence of a ‚heterodoxy‘ in economics.“

Path-dependent paradigmatic patterns in economics

16

Jakob Kapeller

Heterodox economics in the rear-mirror

17

Jakob Kapeller

Heterodox economics in the rear-mirror

17

since the middle of the 90ies: umbrella-term for alternatives to the standard economic approach.

heterodox economics opposition or coherence?

Jakob Kapeller

“

Dequech (2007-8), JPKE, p. 301

One can define heterodox economics negatively, in opposition either to the orthodoxy or to the mainstream. The first alternative is based on intellectual criteria (the divergence from at least some of the main orthodox ideas), and the second on sociological ones (lesser prestige and influence). […] Another possibility would be to define heterodox economics positively, as an intellectual category that is not defined exclusively in opposition to orthodox. When applying this positive concept historically, the result may be an empty set.“

Heterodoxy as pure opposition?

19

Jakob Kapeller

“

Heterodox Economics Newsletter:What is heterodox economics?http://heterodoxnews.com/HEN/home.html

Heterodox Economics is an umbrella term covering various strands of economic thought as well as a series of interdisciplinary research fields. While heterodox economics is internally highly diversified, most heterodox economists agree on certain conceptual definitions (e.g. doing economics is to study the process of social provisioning in a broad sense), theoretical foundations (e.g. the role of uncertainty in economic action or the importance of the principles of effective demand and endogenous money) and a common epistemological framework, that takes the form of pluralist engagement.

Heterodoxy as a coherent research program?

20

Jakob Kapeller

A pre-analytic vision of heterodoxy

• Mainstream: Scarce means - competing ends

• Methodological individualism, rationality, equilibrium (Lagrange-Opt…)

• Heterodoxy: ?

21

Jakob Kapeller

A pre-analytic vision of heterodoxy

• Mainstream: Scarce means - competing ends

• Methodological individualism, rationality, equilibrium (Lagrange-Opt…)

• Heterodoxy: ?

21

• 1. basic question: How do men organize their livelihood/societies organize their provisioning process?

Jakob Kapeller

A pre-analytic vision of heterodoxy

• Mainstream: Scarce means - competing ends

• Methodological individualism, rationality, equilibrium (Lagrange-Opt…)

• Heterodoxy: ?

21

• 1. basic question: How do men organize their livelihood/societies organize their provisioning process?

Jakob Kapeller

A pre-analytic vision of heterodoxy

• Mainstream: Scarce means - competing ends

• Methodological individualism, rationality, equilibrium (Lagrange-Opt…)

• Heterodoxy: ?

21

• 1. basic question: How do men organize their livelihood/societies organize their provisioning process?

• 2. ontology: bottom-up & top-down matter!

Jakob Kapeller

A pre-analytic vision of heterodoxy

• Mainstream: Scarce means - competing ends

• Methodological individualism, rationality, equilibrium (Lagrange-Opt…)

• Heterodoxy: ?

21

• 1. basic question: How do men organize their livelihood/societies organize their provisioning process?

• 2. ontology: bottom-up & top-down matter!

Jakob Kapeller

A pre-analytic vision of heterodoxy

22

Jakob Kapeller

A pre-analytic vision of heterodoxy

22

• 3. the ‚embedded‘ economy: Society and economy are intertwined and mutually dependend — the same holds for the economic sciences!

Jakob Kapeller

A pre-analytic vision of heterodoxy

22

• 3. the ‚embedded‘ economy: Society and economy are intertwined and mutually dependend — the same holds for the economic sciences!

Society

Economy Science

Jakob Kapeller

A pre-analytic vision of heterodoxy

22

• 3. the ‚embedded‘ economy: Society and economy are intertwined and mutually dependend — the same holds for the economic sciences!

• 4. economic development: … is driven by interconnected individuals - connections can be understood as trust, contracts, dependencies or circular flows.

Society

Economy Science

Jakob Kapeller

A pre-analytic vision of heterodoxy

22

• 3. the ‚embedded‘ economy: Society and economy are intertwined and mutually dependend — the same holds for the economic sciences!

• 4. economic development: … is driven by interconnected individuals - connections can be understood as trust, contracts, dependencies or circular flows.

Firms Households

Financial Sector

Aggregate Income

Consumption

Saving Investment

1000

750

250 250

∑= 1000

Society

Economy Science

Jakob Kapeller

A pre-analytic vision of heterodoxy

22

• 3. the ‚embedded‘ economy: Society and economy are intertwined and mutually dependend — the same holds for the economic sciences!

• 4. economic development: … is driven by interconnected individuals - connections can be understood as trust, contracts, dependencies or circular flows.

• 5. inequality: … as a core explanatory variable; not only as a residual.

Firms Households

Financial Sector

Aggregate Income

Consumption

Saving Investment

1000

750

250 250

∑= 1000

Society

Economy Science

Jakob Kapeller

A pre-analytic vision of heterodoxy

22

• 3. the ‚embedded‘ economy: Society and economy are intertwined and mutually dependend — the same holds for the economic sciences!

• 4. economic development: … is driven by interconnected individuals - connections can be understood as trust, contracts, dependencies or circular flows.

• 5. inequality: … as a core explanatory variable; not only as a residual.

Firms Households

Financial Sector

Aggregate Income

Consumption

Saving Investment

1000

750

250 250

∑= 1000

Society

Economy Science

Jakob Kapeller

Heterodoxy vs. Mainstream Conceptual cornerstones on the textbook level

23

Jakob Kapeller

Heterodoxy vs. Mainstream Conceptual cornerstones on the textbook level

23

Mainstream Heterodoxy

Jakob Kapeller

Heterodoxy vs. Mainstream Conceptual cornerstones on the textbook level

23

Mainstream HeterodoxyEconomy as… problem of allocation. problem of provisioning.

Jakob Kapeller

Heterodoxy vs. Mainstream Conceptual cornerstones on the textbook level

23

Mainstream HeterodoxyEconomy as… problem of allocation. problem of provisioning.

Economy as… independent of society. embedded in society.

Jakob Kapeller

Heterodoxy vs. Mainstream Conceptual cornerstones on the textbook level

23

Mainstream HeterodoxyEconomy as… problem of allocation. problem of provisioning.

Economy as… independent of society. embedded in society.

Capitalism as… steady-state. inherently instable.

Jakob Kapeller

Heterodoxy vs. Mainstream Conceptual cornerstones on the textbook level

23

Mainstream HeterodoxyEconomy as… problem of allocation. problem of provisioning.

Economy as… independent of society. embedded in society.

Capitalism as… steady-state. inherently instable.

Markets as… Price-equilibriation Arena of power and forum for ideas

Jakob Kapeller

Heterodoxy vs. Mainstream Conceptual cornerstones on the textbook level

23

Mainstream HeterodoxyEconomy as… problem of allocation. problem of provisioning.

Economy as… independent of society. embedded in society.

Capitalism as… steady-state. inherently instable.

Markets as… Price-equilibriation Arena of power and forum for ideas

Market outcomes… are supply-determined. are demand-determined.

Jakob Kapeller

Heterodoxy vs. Mainstream Conceptual cornerstones on the textbook level

23

Mainstream HeterodoxyEconomy as… problem of allocation. problem of provisioning.

Economy as… independent of society. embedded in society.

Capitalism as… steady-state. inherently instable.

Markets as… Price-equilibriation Arena of power and forum for ideas

Market outcomes… are supply-determined. are demand-determined.

Financial sector… as an intermediary. as driving force (stakeholder & rents!).

Jakob Kapeller

Heterodoxy vs. Mainstream Conceptual cornerstones on the textbook level

23

Mainstream HeterodoxyEconomy as… problem of allocation. problem of provisioning.

Economy as… independent of society. embedded in society.

Capitalism as… steady-state. inherently instable.

Markets as… Price-equilibriation Arena of power and forum for ideas

Market outcomes… are supply-determined. are demand-determined.

Financial sector… as an intermediary. as driving force (stakeholder & rents!).

Free trade as… Extension of production possibilities. Race for the best location & path-dep.

Jakob Kapeller

Heterodoxy vs. Mainstream Conceptual cornerstones on the textbook level

23

Mainstream HeterodoxyEconomy as… problem of allocation. problem of provisioning.

Economy as… independent of society. embedded in society.

Capitalism as… steady-state. inherently instable.

Markets as… Price-equilibriation Arena of power and forum for ideas

Market outcomes… are supply-determined. are demand-determined.

Financial sector… as an intermediary. as driving force (stakeholder & rents!).

Free trade as… Extension of production possibilities. Race for the best location & path-dep.

Preferences as… exogenous. endogenous.

Jakob Kapeller

Heterodoxy vs. Mainstream Conceptual cornerstones on the textbook level

23

Mainstream HeterodoxyEconomy as… problem of allocation. problem of provisioning.

Economy as… independent of society. embedded in society.

Capitalism as… steady-state. inherently instable.

Markets as… Price-equilibriation Arena of power and forum for ideas

Market outcomes… are supply-determined. are demand-determined.

Financial sector… as an intermediary. as driving force (stakeholder & rents!).

Free trade as… Extension of production possibilities. Race for the best location & path-dep.

Preferences as… exogenous. endogenous.

Reason? purely instrumental. virtue-based and instrumental.

Jakob Kapeller

Heterodoxy vs. Mainstream Conceptual cornerstones on the textbook level

23

Mainstream HeterodoxyEconomy as… problem of allocation. problem of provisioning.

Economy as… independent of society. embedded in society.

Capitalism as… steady-state. inherently instable.

Markets as… Price-equilibriation Arena of power and forum for ideas

Market outcomes… are supply-determined. are demand-determined.

Financial sector… as an intermediary. as driving force (stakeholder & rents!).

Free trade as… Extension of production possibilities. Race for the best location & path-dep.

Preferences as… exogenous. endogenous.

Reason? purely instrumental. virtue-based and instrumental.

Action? Opportunistic. Context-dependend! (rules, habits, cooperation, reciprocity, identity).

Jakob Kapeller

Heterodoxy vs. Mainstream Conceptual cornerstones on the textbook level

23

Mainstream HeterodoxyEconomy as… problem of allocation. problem of provisioning.

Economy as… independent of society. embedded in society.

Capitalism as… steady-state. inherently instable.

Markets as… Price-equilibriation Arena of power and forum for ideas

Market outcomes… are supply-determined. are demand-determined.

Financial sector… as an intermediary. as driving force (stakeholder & rents!).

Free trade as… Extension of production possibilities. Race for the best location & path-dep.

Preferences as… exogenous. endogenous.

Reason? purely instrumental. virtue-based and instrumental.

Action? Opportunistic. Context-dependend! (rules, habits, cooperation, reciprocity, identity).

Aims? Maximization Satisficing / Well-being (Eudämonia).

heterodox economics interaction with the mainstream?

Jakob Kapeller

Heterodoxy, mainstream and pluralism

25

97.15%'

47.58%'

2.85%'

52.42%'

0.00%'

20.00%'

40.00%'

60.00%'

80.00%'

100.00%'

120.00%'

in'top'13'orthodox' in'top'13'heterodox'

Interparadigma,c.Discourse.in.Economics.(198982008).

percentage'of'cita<ons'from'top'13'orthodox'journals' percentage'of'cita<ons'from'top'13'heterodox'journals'

Jakob Kapeller

Heterodoxy, mainstream and pluralism A control group

26

97.15%'91.09%'

2.85%'8.91%'

0.00%'

20.00%'

40.00%'

60.00%'

80.00%'

100.00%'

120.00%'

top'13'orthodox'and'top13'heterodox' top'13'orthodox'and'control'group'

Interparadigma,c.Discourse.in.Economics.(198982008):.Adding.a.control.group.

percentage'of'cita>ons'from'top'13'orthodox'journals' percentage'of'cita>ons'from'other'group'

Jakob Kapeller

Heterodoxy, mainstream and pluralism After the crisis

27

97.61%'

24.58%'

2.39%'

74.42%'

0.00%'

20.00%'

40.00%'

60.00%'

80.00%'

100.00%'

120.00%'

in'top'13'orthodox' in'top'13'heterodox'

Interparadigma,c.Discourse.in.Economics.(200982013).

percentage'of'cita<ons'from'top'13'orthodox'journals' percentage'of'cita<ons'from'top'13'heterodox'journals'

Jakob Kapeller

Heterodoxy, mainstream and pluralism A large-scale sample

28

98.30%

69.08%

1.70%

30.92%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

orthodoxjournals(>350.000papers} heterodoxjournals(>50.000papers)

Interparadigma,cDiscourseinEconomics(1969-2013):Analyzingalarge-scalesample

percentageofcitaDonsfromorthodoxjournals(>2.1McitaDons)

percentageofcitaDonsfromheterodoxjournals(>180.000citaDons)

Jakob Kapeller

Heterodoxy, mainstream and pluralism A different view on our large-scale sample

29

Jakob Kapeller

What does mainstream economics think about heterodox economics?

30

Jakob Kapeller

What does mainstream economics think about heterodox economics?

30

My honest answer to that question was that they don’t think about it. For the most part, the mainstream is unaware of the existence of an ‘outside-the-mainstream’ heterodoxy.”

“(Colander 2010, 47)

Pluralism in heterodox economics

Jakob Kapeller

Operationalizing pluralism

32

Leonhard Dobusch is a junior professor of organization theory in the Department of Management at Freie Universitaet

Berlin. Jakob Kapeller is a research fellow in the Department of Philosophy and Theory of Science at the University of

Linz. The authors would like to thank Volker Gadenne, John King, and Marc Lavoie for their comments and their

support. 1035

©2012, Journal of Economic Issues / Association for Evolutionary Economics

JOURNAL OF ECONOMIC ISSUES Vol. XLV I No. 4 December 2012 DOI 10.2753/JEI0021-3624460410

Heterodox United vs. Mainstream City? Sketching a Framework for Interested Pluralism in Economics

Leonhard Dobusch and Jakob Kapeller

Abstract: Pluralism is a key term in the current discourse in heterodox economics, emphasizing the need for greater theoretical integration and institutional cooperation of different economic traditions. However, both the nature of pluralism and the concrete role ascribed to pluralist thinking for the development of economics have been somewhat contested, pointing to a lack of (widely agreed) conceptual foundations. This paper addresses this conceptual gap by proposing a framework for interested pluralism as a guideline for organizing heterodox economic research, in particular, as well as economic debates, in general. In essence, interested pluralism suggests replacing the traditionally invoked demarcation criteria between different economic traditions by a set of rather ecumenical pluralist principles, whose concrete implications for economic research we discuss. Keywords: heterodox economics, paradigms, pluralism, sociology of economics JEL Classification Codes: A14, B40, B50

[A] plurality of paradigms in economics and in social sciences in general is not only an obvious fact but also a necessary and desirable phenomenon in a very complex and continually changing subject. … Depending on circumstances and the problem to be tackled, different approaches, or a combination of them, have to be used in order to be able to get nearer to the far-away “truth.”

— K.W. Rothschild (1999, 5)

The rise of the neoclassical paradigm to unprecedented dominance in economic thought has been matched by the parallel growth of literature on economic pluralism, mostly put forward by schools of economic thought, which have found themselves increasingly marginalized. In the introduction to their recent, edited volume, Economic

Jakob Kapeller

Operationalizing pluralism

32

Leonhard Dobusch is a junior professor of organization theory in the Department of Management at Freie Universitaet

Berlin. Jakob Kapeller is a research fellow in the Department of Philosophy and Theory of Science at the University of

Linz. The authors would like to thank Volker Gadenne, John King, and Marc Lavoie for their comments and their

support. 1035

©2012, Journal of Economic Issues / Association for Evolutionary Economics

JOURNAL OF ECONOMIC ISSUES Vol. XLV I No. 4 December 2012 DOI 10.2753/JEI0021-3624460410

Heterodox United vs. Mainstream City? Sketching a Framework for Interested Pluralism in Economics

Leonhard Dobusch and Jakob Kapeller

Abstract: Pluralism is a key term in the current discourse in heterodox economics, emphasizing the need for greater theoretical integration and institutional cooperation of different economic traditions. However, both the nature of pluralism and the concrete role ascribed to pluralist thinking for the development of economics have been somewhat contested, pointing to a lack of (widely agreed) conceptual foundations. This paper addresses this conceptual gap by proposing a framework for interested pluralism as a guideline for organizing heterodox economic research, in particular, as well as economic debates, in general. In essence, interested pluralism suggests replacing the traditionally invoked demarcation criteria between different economic traditions by a set of rather ecumenical pluralist principles, whose concrete implications for economic research we discuss. Keywords: heterodox economics, paradigms, pluralism, sociology of economics JEL Classification Codes: A14, B40, B50

[A] plurality of paradigms in economics and in social sciences in general is not only an obvious fact but also a necessary and desirable phenomenon in a very complex and continually changing subject. … Depending on circumstances and the problem to be tackled, different approaches, or a combination of them, have to be used in order to be able to get nearer to the far-away “truth.”

— K.W. Rothschild (1999, 5)

The rise of the neoclassical paradigm to unprecedented dominance in economic thought has been matched by the parallel growth of literature on economic pluralism, mostly put forward by schools of economic thought, which have found themselves increasingly marginalized. In the introduction to their recent, edited volume, Economic

1050

Leonhard Dobusch and Jakob Kapeller

understanding. Here, again, a “Colanderian” approach of searching for a discourse on the level of economic policy (Colander et al. 2010, 406) might prove more fruitful (and also more “pluralist”) than the “classical” approach of invoking fundamental theoretical debates.

Practicing Pluralism: Integration, Diversification, Comparison, and Exchange

While “disinterested pluralism,” or “plurality,” implies fragmented, divergent

approaches, we can associate “interested pluralism” with the integration of different schools of thought (Bigo and Neru 2008). But what does a quest for integration entail for research practice, in general, and individual researchers, in particular? Since we have developed our concept of a “pluralist paradigm” from an empirically descriptive perspective, this question has implications beyond the normative. The viability of any framework for interested pluralism also depends on its ability to inform the practical conduct of individuals and groups researching within the economic discipline, thereby taking into account existing institutional restrictions for more (interested) pluralism. We first discuss implications on a general level and then turn to concrete examples from the heterodox economics discourse, where differences and similarities between various traditions are relatively well documented. However, in theory, the same arguments also apply to other dissenting traditions or economists.

In light of Frederic Lee’s (2010, 19) stance that pluralism implies “engagement across different heterodox approaches,” we argue that this engagement would be most productively realized at the level of theoretical statements, dealing with distinct empirical phenomena. Instead of comparing paradigms at an abstract level, this approach allows for the comparison of theories, as well as the continuation of empirical work, on real-world economic problems. Essentially, we advocate the systematic comparison of theoretical statements from different heterodox traditions, resulting in different research practices (see Table 4). This would allow pluralist practices to be interpreted as complementary research strategies, whose orientation depends on the relationships between different theoretical statements stemming from distinct schools of economic thought.

Table 4. Strategies for Comparing Theoretical Statements of Different Economic Paradigms

# Comparison between theoretical statements

Pluralist research practices / strategies

(1) ! Identical (a) Integration

(2) # Convergent

(3) %% Compatible (b) Division of labor

(4) O O Neutral (c) Diversification

(5) # Divergent (d) Test of conflicting hypotheses

(6) ! Contradictory

Jakob Kapeller

Operationalizing pluralism

32

Leonhard Dobusch is a junior professor of organization theory in the Department of Management at Freie Universitaet

Berlin. Jakob Kapeller is a research fellow in the Department of Philosophy and Theory of Science at the University of

Linz. The authors would like to thank Volker Gadenne, John King, and Marc Lavoie for their comments and their

support. 1035

©2012, Journal of Economic Issues / Association for Evolutionary Economics

JOURNAL OF ECONOMIC ISSUES Vol. XLV I No. 4 December 2012 DOI 10.2753/JEI0021-3624460410

Heterodox United vs. Mainstream City? Sketching a Framework for Interested Pluralism in Economics

Leonhard Dobusch and Jakob Kapeller

Abstract: Pluralism is a key term in the current discourse in heterodox economics, emphasizing the need for greater theoretical integration and institutional cooperation of different economic traditions. However, both the nature of pluralism and the concrete role ascribed to pluralist thinking for the development of economics have been somewhat contested, pointing to a lack of (widely agreed) conceptual foundations. This paper addresses this conceptual gap by proposing a framework for interested pluralism as a guideline for organizing heterodox economic research, in particular, as well as economic debates, in general. In essence, interested pluralism suggests replacing the traditionally invoked demarcation criteria between different economic traditions by a set of rather ecumenical pluralist principles, whose concrete implications for economic research we discuss. Keywords: heterodox economics, paradigms, pluralism, sociology of economics JEL Classification Codes: A14, B40, B50

[A] plurality of paradigms in economics and in social sciences in general is not only an obvious fact but also a necessary and desirable phenomenon in a very complex and continually changing subject. … Depending on circumstances and the problem to be tackled, different approaches, or a combination of them, have to be used in order to be able to get nearer to the far-away “truth.”

— K.W. Rothschild (1999, 5)

The rise of the neoclassical paradigm to unprecedented dominance in economic thought has been matched by the parallel growth of literature on economic pluralism, mostly put forward by schools of economic thought, which have found themselves increasingly marginalized. In the introduction to their recent, edited volume, Economic

1050

Leonhard Dobusch and Jakob Kapeller

understanding. Here, again, a “Colanderian” approach of searching for a discourse on the level of economic policy (Colander et al. 2010, 406) might prove more fruitful (and also more “pluralist”) than the “classical” approach of invoking fundamental theoretical debates.

Practicing Pluralism: Integration, Diversification, Comparison, and Exchange

While “disinterested pluralism,” or “plurality,” implies fragmented, divergent

approaches, we can associate “interested pluralism” with the integration of different schools of thought (Bigo and Neru 2008). But what does a quest for integration entail for research practice, in general, and individual researchers, in particular? Since we have developed our concept of a “pluralist paradigm” from an empirically descriptive perspective, this question has implications beyond the normative. The viability of any framework for interested pluralism also depends on its ability to inform the practical conduct of individuals and groups researching within the economic discipline, thereby taking into account existing institutional restrictions for more (interested) pluralism. We first discuss implications on a general level and then turn to concrete examples from the heterodox economics discourse, where differences and similarities between various traditions are relatively well documented. However, in theory, the same arguments also apply to other dissenting traditions or economists.

In light of Frederic Lee’s (2010, 19) stance that pluralism implies “engagement across different heterodox approaches,” we argue that this engagement would be most productively realized at the level of theoretical statements, dealing with distinct empirical phenomena. Instead of comparing paradigms at an abstract level, this approach allows for the comparison of theories, as well as the continuation of empirical work, on real-world economic problems. Essentially, we advocate the systematic comparison of theoretical statements from different heterodox traditions, resulting in different research practices (see Table 4). This would allow pluralist practices to be interpreted as complementary research strategies, whose orientation depends on the relationships between different theoretical statements stemming from distinct schools of economic thought.

Table 4. Strategies for Comparing Theoretical Statements of Different Economic Paradigms

# Comparison between theoretical statements

Pluralist research practices / strategies

(1) ! Identical (a) Integration

(2) # Convergent

(3) %% Compatible (b) Division of labor

(4) O O Neutral (c) Diversification

(5) # Divergent (d) Test of conflicting hypotheses

(6) ! Contradictory

„irreversibility of action“ (uncertainty, non-ergodicitiy) as a prominent concept in evolutionary, post-Keynesian, logical or Austrian thought.

Jakob Kapeller

Operationalizing pluralism

32

Leonhard Dobusch is a junior professor of organization theory in the Department of Management at Freie Universitaet

Berlin. Jakob Kapeller is a research fellow in the Department of Philosophy and Theory of Science at the University of

Linz. The authors would like to thank Volker Gadenne, John King, and Marc Lavoie for their comments and their

support. 1035

©2012, Journal of Economic Issues / Association for Evolutionary Economics

JOURNAL OF ECONOMIC ISSUES Vol. XLV I No. 4 December 2012 DOI 10.2753/JEI0021-3624460410

Heterodox United vs. Mainstream City? Sketching a Framework for Interested Pluralism in Economics

Leonhard Dobusch and Jakob Kapeller

Abstract: Pluralism is a key term in the current discourse in heterodox economics, emphasizing the need for greater theoretical integration and institutional cooperation of different economic traditions. However, both the nature of pluralism and the concrete role ascribed to pluralist thinking for the development of economics have been somewhat contested, pointing to a lack of (widely agreed) conceptual foundations. This paper addresses this conceptual gap by proposing a framework for interested pluralism as a guideline for organizing heterodox economic research, in particular, as well as economic debates, in general. In essence, interested pluralism suggests replacing the traditionally invoked demarcation criteria between different economic traditions by a set of rather ecumenical pluralist principles, whose concrete implications for economic research we discuss. Keywords: heterodox economics, paradigms, pluralism, sociology of economics JEL Classification Codes: A14, B40, B50

[A] plurality of paradigms in economics and in social sciences in general is not only an obvious fact but also a necessary and desirable phenomenon in a very complex and continually changing subject. … Depending on circumstances and the problem to be tackled, different approaches, or a combination of them, have to be used in order to be able to get nearer to the far-away “truth.”

— K.W. Rothschild (1999, 5)

The rise of the neoclassical paradigm to unprecedented dominance in economic thought has been matched by the parallel growth of literature on economic pluralism, mostly put forward by schools of economic thought, which have found themselves increasingly marginalized. In the introduction to their recent, edited volume, Economic

1050

Leonhard Dobusch and Jakob Kapeller

understanding. Here, again, a “Colanderian” approach of searching for a discourse on the level of economic policy (Colander et al. 2010, 406) might prove more fruitful (and also more “pluralist”) than the “classical” approach of invoking fundamental theoretical debates.

Practicing Pluralism: Integration, Diversification, Comparison, and Exchange

While “disinterested pluralism,” or “plurality,” implies fragmented, divergent

approaches, we can associate “interested pluralism” with the integration of different schools of thought (Bigo and Neru 2008). But what does a quest for integration entail for research practice, in general, and individual researchers, in particular? Since we have developed our concept of a “pluralist paradigm” from an empirically descriptive perspective, this question has implications beyond the normative. The viability of any framework for interested pluralism also depends on its ability to inform the practical conduct of individuals and groups researching within the economic discipline, thereby taking into account existing institutional restrictions for more (interested) pluralism. We first discuss implications on a general level and then turn to concrete examples from the heterodox economics discourse, where differences and similarities between various traditions are relatively well documented. However, in theory, the same arguments also apply to other dissenting traditions or economists.

In light of Frederic Lee’s (2010, 19) stance that pluralism implies “engagement across different heterodox approaches,” we argue that this engagement would be most productively realized at the level of theoretical statements, dealing with distinct empirical phenomena. Instead of comparing paradigms at an abstract level, this approach allows for the comparison of theories, as well as the continuation of empirical work, on real-world economic problems. Essentially, we advocate the systematic comparison of theoretical statements from different heterodox traditions, resulting in different research practices (see Table 4). This would allow pluralist practices to be interpreted as complementary research strategies, whose orientation depends on the relationships between different theoretical statements stemming from distinct schools of economic thought.

Table 4. Strategies for Comparing Theoretical Statements of Different Economic Paradigms

# Comparison between theoretical statements

Pluralist research practices / strategies

(1) ! Identical (a) Integration

(2) # Convergent

(3) %% Compatible (b) Division of labor

(4) O O Neutral (c) Diversification

(5) # Divergent (d) Test of conflicting hypotheses

(6) ! Contradictory

„irreversibility of action“ (uncertainty, non-ergodicitiy) as a prominent concept in evolutionary, post-Keynesian, logical or Austrian thought.

„consumer theory“ emergence of consumer preferences (Veblen) vs. impact of changing preferences on the business cycle (Keynes)

Jakob Kapeller

Operationalizing pluralism

32

Leonhard Dobusch is a junior professor of organization theory in the Department of Management at Freie Universitaet

Berlin. Jakob Kapeller is a research fellow in the Department of Philosophy and Theory of Science at the University of

Linz. The authors would like to thank Volker Gadenne, John King, and Marc Lavoie for their comments and their

support. 1035

©2012, Journal of Economic Issues / Association for Evolutionary Economics

JOURNAL OF ECONOMIC ISSUES Vol. XLV I No. 4 December 2012 DOI 10.2753/JEI0021-3624460410

Heterodox United vs. Mainstream City? Sketching a Framework for Interested Pluralism in Economics

Leonhard Dobusch and Jakob Kapeller

Abstract: Pluralism is a key term in the current discourse in heterodox economics, emphasizing the need for greater theoretical integration and institutional cooperation of different economic traditions. However, both the nature of pluralism and the concrete role ascribed to pluralist thinking for the development of economics have been somewhat contested, pointing to a lack of (widely agreed) conceptual foundations. This paper addresses this conceptual gap by proposing a framework for interested pluralism as a guideline for organizing heterodox economic research, in particular, as well as economic debates, in general. In essence, interested pluralism suggests replacing the traditionally invoked demarcation criteria between different economic traditions by a set of rather ecumenical pluralist principles, whose concrete implications for economic research we discuss. Keywords: heterodox economics, paradigms, pluralism, sociology of economics JEL Classification Codes: A14, B40, B50

[A] plurality of paradigms in economics and in social sciences in general is not only an obvious fact but also a necessary and desirable phenomenon in a very complex and continually changing subject. … Depending on circumstances and the problem to be tackled, different approaches, or a combination of them, have to be used in order to be able to get nearer to the far-away “truth.”

— K.W. Rothschild (1999, 5)

The rise of the neoclassical paradigm to unprecedented dominance in economic thought has been matched by the parallel growth of literature on economic pluralism, mostly put forward by schools of economic thought, which have found themselves increasingly marginalized. In the introduction to their recent, edited volume, Economic

1050

Leonhard Dobusch and Jakob Kapeller

understanding. Here, again, a “Colanderian” approach of searching for a discourse on the level of economic policy (Colander et al. 2010, 406) might prove more fruitful (and also more “pluralist”) than the “classical” approach of invoking fundamental theoretical debates.

Practicing Pluralism: Integration, Diversification, Comparison, and Exchange

While “disinterested pluralism,” or “plurality,” implies fragmented, divergent

approaches, we can associate “interested pluralism” with the integration of different schools of thought (Bigo and Neru 2008). But what does a quest for integration entail for research practice, in general, and individual researchers, in particular? Since we have developed our concept of a “pluralist paradigm” from an empirically descriptive perspective, this question has implications beyond the normative. The viability of any framework for interested pluralism also depends on its ability to inform the practical conduct of individuals and groups researching within the economic discipline, thereby taking into account existing institutional restrictions for more (interested) pluralism. We first discuss implications on a general level and then turn to concrete examples from the heterodox economics discourse, where differences and similarities between various traditions are relatively well documented. However, in theory, the same arguments also apply to other dissenting traditions or economists.

In light of Frederic Lee’s (2010, 19) stance that pluralism implies “engagement across different heterodox approaches,” we argue that this engagement would be most productively realized at the level of theoretical statements, dealing with distinct empirical phenomena. Instead of comparing paradigms at an abstract level, this approach allows for the comparison of theories, as well as the continuation of empirical work, on real-world economic problems. Essentially, we advocate the systematic comparison of theoretical statements from different heterodox traditions, resulting in different research practices (see Table 4). This would allow pluralist practices to be interpreted as complementary research strategies, whose orientation depends on the relationships between different theoretical statements stemming from distinct schools of economic thought.

Table 4. Strategies for Comparing Theoretical Statements of Different Economic Paradigms

# Comparison between theoretical statements

Pluralist research practices / strategies

(1) ! Identical (a) Integration

(2) # Convergent

(3) %% Compatible (b) Division of labor

(4) O O Neutral (c) Diversification

(5) # Divergent (d) Test of conflicting hypotheses

(6) ! Contradictory

„irreversibility of action“ (uncertainty, non-ergodicitiy) as a prominent concept in evolutionary, post-Keynesian, logical or Austrian thought.

„evolutionary modeling“ applied to Keynesian ideas (e.g. Goodwin 1967, Keen 1995)

„consumer theory“ emergence of consumer preferences (Veblen) vs. impact of changing preferences on the business cycle (Keynes)

Jakob Kapeller

Operationalizing pluralism

32

Leonhard Dobusch is a junior professor of organization theory in the Department of Management at Freie Universitaet

Berlin. Jakob Kapeller is a research fellow in the Department of Philosophy and Theory of Science at the University of

Linz. The authors would like to thank Volker Gadenne, John King, and Marc Lavoie for their comments and their

support. 1035

©2012, Journal of Economic Issues / Association for Evolutionary Economics

JOURNAL OF ECONOMIC ISSUES Vol. XLV I No. 4 December 2012 DOI 10.2753/JEI0021-3624460410

Heterodox United vs. Mainstream City? Sketching a Framework for Interested Pluralism in Economics

Leonhard Dobusch and Jakob Kapeller

Abstract: Pluralism is a key term in the current discourse in heterodox economics, emphasizing the need for greater theoretical integration and institutional cooperation of different economic traditions. However, both the nature of pluralism and the concrete role ascribed to pluralist thinking for the development of economics have been somewhat contested, pointing to a lack of (widely agreed) conceptual foundations. This paper addresses this conceptual gap by proposing a framework for interested pluralism as a guideline for organizing heterodox economic research, in particular, as well as economic debates, in general. In essence, interested pluralism suggests replacing the traditionally invoked demarcation criteria between different economic traditions by a set of rather ecumenical pluralist principles, whose concrete implications for economic research we discuss. Keywords: heterodox economics, paradigms, pluralism, sociology of economics JEL Classification Codes: A14, B40, B50

[A] plurality of paradigms in economics and in social sciences in general is not only an obvious fact but also a necessary and desirable phenomenon in a very complex and continually changing subject. … Depending on circumstances and the problem to be tackled, different approaches, or a combination of them, have to be used in order to be able to get nearer to the far-away “truth.”

— K.W. Rothschild (1999, 5)

The rise of the neoclassical paradigm to unprecedented dominance in economic thought has been matched by the parallel growth of literature on economic pluralism, mostly put forward by schools of economic thought, which have found themselves increasingly marginalized. In the introduction to their recent, edited volume, Economic

1050

Leonhard Dobusch and Jakob Kapeller

understanding. Here, again, a “Colanderian” approach of searching for a discourse on the level of economic policy (Colander et al. 2010, 406) might prove more fruitful (and also more “pluralist”) than the “classical” approach of invoking fundamental theoretical debates.

Practicing Pluralism: Integration, Diversification, Comparison, and Exchange

While “disinterested pluralism,” or “plurality,” implies fragmented, divergent

approaches, we can associate “interested pluralism” with the integration of different schools of thought (Bigo and Neru 2008). But what does a quest for integration entail for research practice, in general, and individual researchers, in particular? Since we have developed our concept of a “pluralist paradigm” from an empirically descriptive perspective, this question has implications beyond the normative. The viability of any framework for interested pluralism also depends on its ability to inform the practical conduct of individuals and groups researching within the economic discipline, thereby taking into account existing institutional restrictions for more (interested) pluralism. We first discuss implications on a general level and then turn to concrete examples from the heterodox economics discourse, where differences and similarities between various traditions are relatively well documented. However, in theory, the same arguments also apply to other dissenting traditions or economists.

In light of Frederic Lee’s (2010, 19) stance that pluralism implies “engagement across different heterodox approaches,” we argue that this engagement would be most productively realized at the level of theoretical statements, dealing with distinct empirical phenomena. Instead of comparing paradigms at an abstract level, this approach allows for the comparison of theories, as well as the continuation of empirical work, on real-world economic problems. Essentially, we advocate the systematic comparison of theoretical statements from different heterodox traditions, resulting in different research practices (see Table 4). This would allow pluralist practices to be interpreted as complementary research strategies, whose orientation depends on the relationships between different theoretical statements stemming from distinct schools of economic thought.

Table 4. Strategies for Comparing Theoretical Statements of Different Economic Paradigms

# Comparison between theoretical statements

Pluralist research practices / strategies

(1) ! Identical (a) Integration

(2) # Convergent

(3) %% Compatible (b) Division of labor

(4) O O Neutral (c) Diversification

(5) # Divergent (d) Test of conflicting hypotheses

(6) ! Contradictory

„irreversibility of action“ (uncertainty, non-ergodicitiy) as a prominent concept in evolutionary, post-Keynesian, logical or Austrian thought.

„monetary theory“ neoclassical vs. post-Keynesian theory: should central banks target money supply or interest rates?

„evolutionary modeling“ applied to Keynesian ideas (e.g. Goodwin 1967, Keen 1995)

„consumer theory“ emergence of consumer preferences (Veblen) vs. impact of changing preferences on the business cycle (Keynes)

Jakob Kapeller

Examples for pluralist research practices

33

Jakob Kapeller

Examples for pluralist research practices

33

Jakob Kapeller

Examples for pluralist research practices

33

Jakob Kapeller

Integration: Minsky-Veblen Cycles

34

Journal of Post Keynesian Economics / Summer 2014, Vol. 36, No. 4 781© 2014 M.E. Sharpe, Inc. All rights reserved. Permissions: www.copyright.com

ISSN 0160–3477 (print) / ISSN 1557–7821 (online)DOI: 10.2753/PKE0160-3477360409

JAKOB KAPELLER AND BERNHARD SCHÜTZ

Debt, boom, bust: a theory of Minsky–Veblen cycles

Abstract: This article reflects on the economic development leading to the recent crisis and interprets this development as a series of events within a Minsky–Veblen cycle. To illustrate this claim we introduce conspicuous con-sumption concerns, as described by Veblen, into a stock-flow-consistent post Keynesian model and demonstrate that, under these conditions, a decrease in income equality leads to a corresponding increase in debt-financed consump-tion demand. Here Minskian dynamics come into play: if perceived economic stability causes banks’ margins of safety to decrease sufficiently, increased credit demand is accommodated by credit supply giving rise to a debt-financed consumption boom. As the solvency of households decreases and interest rates move up, banks reduce lending, triggering household bankruptcies and, finally, a recession. What follows is a stable period of consolidation, where past debts are repaid, financial stability is regained and conspicuous consumption motives may gradually take over again. We illustrate this approach to the current crisis and its explanatory validity by extending our stock-flow-consistent model into a dynamic simulation.

Key words: financial instability, inequality, business cycle, stock-flow consistency, Minsky, Veblen.

JEL classifications: B52, D11, E12, E20, G01.

If one were asked by an educated layperson about the best way to under-stand the “current crisis,” which has already evolved from a financial or private debt crisis to a sovereign debt crisis, we claim that one legitimate answer would be the following: first, read Thorstein Veblen’s seminal book The Theory of the Leisure Class (especially chapters 4–5), and pay

Jakob Kapeller is an assistant professor in the Department of Philosophy and Theory of Science at the University of Linz. Bernhard Schütz is an assistant professor in the Department of Economics at the University of Linz. For helpful comments, the authors would like to thank Michael Landesmann, Martin Riese, Thomas Palley, Engelbert Stockhammer, and Octavio Fernández-Amador. Furthermore, we are greatly indebted to Miriam Rehm, who started us off on Minsky, and Stefan Steinerberger,whose patient advice guided us through our first steps in Mathematica. Remaining errors are ours.

Jakob Kapeller

“(Veblen 1970[1899], p. 80)

People try to „live up to the conventional standard of decency in the amount and grade of goods consumed.”

Veblen: the social mediation of consumption

35

Jakob Kapeller

“Minsky (Stabilizing an Unstable Economy, 1986/2008), p. 256

Banking is not money lending; to lend, a money lender must have money. The fundamental banking activity is accepting, that is, guaranteeing that some party is creditworthy.“

Minsky: The fragility of banking „stability breeds instability“

36

Jakob Kapeller

Minsky-Veblen Cycles

37

Debt, Boom, Bust: A Theory of Minsky-Veblen Cycles

Jakob KapellerUniversity of Linz

Department of Philosophy and Theory of Science

jakob.kapeller@jku.at

Bernhard SchützUniversity of Linz

Department of Economics

bernhard.schuetz@jku.at

The basic story

The research questions

1.) Can the recent crisis be interpreted as a part of a larger cycle?2.) Is it possible to create such cycles in a post-Keynesian, stock-flow consistent framework?3.) If yes, what assumptions are sufficient to acquire such a result?

Out

put

Debt

Expansion Compression

Panic

Consolidation

Framework and main assumptions

stock-flow-consistent closed economy model with no state

a Minskyian financial sector, where banks become more confident in stable periods and get more anxious in volatile periods

two classes (workers and capitalists)

two types of workers, where type 2 workers lose income relative to type 1 workers, which gives rise to conspicuous consumption motives that increase the demand for consumer credit and boost aggregate demand

The answer

Expansion

Compression

Panic

Consolidation

A simulation model based on these specs delivers the following cyclical behavior of aggregate output...

...which is accompanied by the expected debt-output cycle (the amount of dots indicates the duration of the respective phase).

Out

put

Debt

7.5

8.0

8.5

9.0

108 110 112 114 116 118

Expansion Compression

Panic

Consolidation 7.5

8.0

8.5

9.0

13.0 13.5 14.0 14.5 15.0 15.5

Out

put

Debt / Output

Expansion

Compression

Panic

Consolidation

Detailed simulation results88 Scenario 1: Baseline Case Scenario 2: Inequality and contraction Scenario 3: Inequality and expansion

200

100

6

8

4

2

100 200 300 400

GDP Cw1 Cw2 Cc I

YDw2 Profits Banks Profits Firms

Mw2 Mc Mw1 Bank Equity

100 200 300 400

0.5

1.0

1.5

2.0

100 200 300 400

20

40

60

80

100

Mw2 Mc Mw1 Bank Equity

100 200 300 400

20

40

60

80

100

Mw2 Mc Mw1 Bank Equity

100 200 300 400

-200

400

200

YDw2 Profits Banks Profits Firms

100 200 300 400

YDw2 Profits Banks Profits Firms

100 200 300 4000.5

1.0

1.5

1

2

3

4

-1

100 200 300 400

GDP Cw1 Cw2 Cc I

6

8

4

2

6

8

4

2

10

100 200 300 400

GDP Cw1 Cw2 Cc I

Scenario 4a: Minsky-Veblen Cycles - Speculative Dynamics

Scenario 4b: Minsky-Veblen Cycles - Ponzi Dynamics

Scenario 4c: Minsky-Veblen Cycles - Hedge Dynamics

GDP Cw1 Cw2 Cc I

YDw2 Profits B. Profits F. Safety Margin

Mw2 Mc Mw1 Bank Equity

interest rate

GDP Cw1 Cw2 Cc I GDP Cw1 Cw2 Cc I

Mw2 Mc Mw1 Bank Equity Mw2 Mc Mw1 Bank Equity

YDw2 Profits B. Profits F. Safety Margin YDw2 Profits B. Profits F. Safety Margin

interest rate

interest rate

100 200 300 400

6

8

4

2

100 200 300 400

6

8

4

2

100 200 300 400

6

8

4

2

100 200 300 400

-1

1

2

3

100 200 300 400

-1.0

1.0

2.0

3.0

100 200 300 400

0.5

1.0

1.5

2.0

100 200 300 40020

40

60

80

100

100200 300 40020

-20

100

100 200 300 400

80

20

100

60

40

100 200 300 400

0.052

0.046

0.054

0.050

0.048

0.056

0.058

100 200 300 400

0.052

0.046

0.050

0.048

100 200 300 400

0.048

0.045

0.049

0.047

0.046

0.050

40

60

80

GDP Cw1 Cw2 Cc I

100 200 300 400

6

8

4

2

• stock-flow consistent model

• Two classes: Some share of workers

loses income.

• Emulation: Losers try to keep up with

other workers/their old living standard -

Credit-Demand!

• Minskyian banks: economic stability -

increase in risk-taking: Credit-Supply!

basic idea

Jakob Kapeller

Minsky-Veblen Cycles

37

Debt, Boom, Bust: A Theory of Minsky-Veblen Cycles

Jakob KapellerUniversity of Linz

Department of Philosophy and Theory of Science

jakob.kapeller@jku.at

Bernhard SchützUniversity of Linz

Department of Economics

bernhard.schuetz@jku.at

The basic story

The research questions

1.) Can the recent crisis be interpreted as a part of a larger cycle?2.) Is it possible to create such cycles in a post-Keynesian, stock-flow consistent framework?3.) If yes, what assumptions are sufficient to acquire such a result?

Out

put

Debt

Expansion Compression

Panic

Consolidation

Framework and main assumptions

stock-flow-consistent closed economy model with no state

a Minskyian financial sector, where banks become more confident in stable periods and get more anxious in volatile periods

two classes (workers and capitalists)

two types of workers, where type 2 workers lose income relative to type 1 workers, which gives rise to conspicuous consumption motives that increase the demand for consumer credit and boost aggregate demand

The answer

Expansion

Compression

Panic

Consolidation

A simulation model based on these specs delivers the following cyclical behavior of aggregate output...

...which is accompanied by the expected debt-output cycle (the amount of dots indicates the duration of the respective phase).

Out

put

Debt

7.5

8.0

8.5

9.0

108 110 112 114 116 118

Expansion Compression

Panic

Consolidation 7.5

8.0

8.5

9.0

13.0 13.5 14.0 14.5 15.0 15.5

Out

put

Debt / Output

Expansion

Compression

Panic

Consolidation

Detailed simulation results88 Scenario 1: Baseline Case Scenario 2: Inequality and contraction Scenario 3: Inequality and expansion

200

100

6

8

4

2

100 200 300 400

GDP Cw1 Cw2 Cc I

YDw2 Profits Banks Profits Firms

Mw2 Mc Mw1 Bank Equity

100 200 300 400

0.5

1.0

1.5

2.0

100 200 300 400

20

40

60

80

100

Mw2 Mc Mw1 Bank Equity

100 200 300 400

20

40

60

80

100

Mw2 Mc Mw1 Bank Equity

100 200 300 400

-200

400

200

YDw2 Profits Banks Profits Firms

100 200 300 400

YDw2 Profits Banks Profits Firms

100 200 300 4000.5

1.0

1.5

1

2

3

4

-1

100 200 300 400

GDP Cw1 Cw2 Cc I

6

8

4

2

6

8

4

2

10

100 200 300 400

GDP Cw1 Cw2 Cc I

Scenario 4a: Minsky-Veblen Cycles - Speculative Dynamics

Scenario 4b: Minsky-Veblen Cycles - Ponzi Dynamics

Scenario 4c: Minsky-Veblen Cycles - Hedge Dynamics

GDP Cw1 Cw2 Cc I

YDw2 Profits B. Profits F. Safety Margin

Mw2 Mc Mw1 Bank Equity

interest rate

GDP Cw1 Cw2 Cc I GDP Cw1 Cw2 Cc I

Mw2 Mc Mw1 Bank Equity Mw2 Mc Mw1 Bank Equity

YDw2 Profits B. Profits F. Safety Margin YDw2 Profits B. Profits F. Safety Margin

interest rate

interest rate

100 200 300 400

6

8

4

2

100 200 300 400

6

8

4

2

100 200 300 400

6

8

4

2

100 200 300 400

-1

1

2

3

100 200 300 400

-1.0

1.0

2.0

3.0

100 200 300 400

0.5

1.0

1.5

2.0

100 200 300 40020

40

60

80

100

100200 300 40020

-20

100

100 200 300 400

80

20

100

60

40

100 200 300 400

0.052

0.046

0.054

0.050

0.048

0.056

0.058

100 200 300 400

0.052

0.046

0.050

0.048

100 200 300 400

0.048

0.045

0.049

0.047

0.046

0.050

40

60

80

GDP Cw1 Cw2 Cc I

100 200 300 400

6

8

4

2

• stock-flow consistent model

• Two classes: Some share of workers

loses income.

• Emulation: Losers try to keep up with

other workers/their old living standard -

Credit-Demand!

• Minskyian banks: economic stability -

increase in risk-taking: Credit-Supply!

basic idea

Debt, Boom, Bust: A Theory of Minsky-Veblen Cycles

Jakob KapellerUniversity of Linz

Department of Philosophy and Theory of Science

jakob.kapeller@jku.at

Bernhard SchützUniversity of Linz

Department of Economics

bernhard.schuetz@jku.at

The basic story

The research questions

1.) Can the recent crisis be interpreted as a part of a larger cycle?2.) Is it possible to create such cycles in a post-Keynesian, stock-flow consistent framework?3.) If yes, what assumptions are sufficient to acquire such a result?

Out

put

Debt

Expansion Compression

Panic

Consolidation

Framework and main assumptions

stock-flow-consistent closed economy model with no state

a Minskyian financial sector, where banks become more confident in stable periods and get more anxious in volatile periods

two classes (workers and capitalists)

two types of workers, where type 2 workers lose income relative to type 1 workers, which gives rise to conspicuous consumption motives that increase the demand for consumer credit and boost aggregate demand

The answer

Expansion

Compression

Panic

Consolidation

A simulation model based on these specs delivers the following cyclical behavior of aggregate output...

...which is accompanied by the expected debt-output cycle (the amount of dots indicates the duration of the respective phase).

Out

put

Debt

7.5

8.0

8.5

9.0

108 110 112 114 116 118

Expansion Compression

Panic

Consolidation 7.5

8.0

8.5

9.0

13.0 13.5 14.0 14.5 15.0 15.5

Out

put

Debt / Output

Expansion

Compression

Panic

Consolidation

Detailed simulation results88 Scenario 1: Baseline Case Scenario 2: Inequality and contraction Scenario 3: Inequality and expansion

200

100

6

8

4

2

100 200 300 400

GDP Cw1 Cw2 Cc I

YDw2 Profits Banks Profits Firms

Mw2 Mc Mw1 Bank Equity

100 200 300 400

0.5

1.0

1.5

2.0

100 200 300 400

20

40

60

80

100

Mw2 Mc Mw1 Bank Equity

100 200 300 400

20

40

60

80

100

Mw2 Mc Mw1 Bank Equity

100 200 300 400

-200

400

200

YDw2 Profits Banks Profits Firms

100 200 300 400

YDw2 Profits Banks Profits Firms

100 200 300 4000.5

1.0

1.5

1

2

3

4

-1

100 200 300 400

GDP Cw1 Cw2 Cc I

6

8

4

2

6

8

4

2

10

100 200 300 400

GDP Cw1 Cw2 Cc I

Scenario 4a: Minsky-Veblen Cycles - Speculative Dynamics

Scenario 4b: Minsky-Veblen Cycles - Ponzi Dynamics

Scenario 4c: Minsky-Veblen Cycles - Hedge Dynamics

GDP Cw1 Cw2 Cc I

YDw2 Profits B. Profits F. Safety Margin

Mw2 Mc Mw1 Bank Equity

interest rate

GDP Cw1 Cw2 Cc I GDP Cw1 Cw2 Cc I

Mw2 Mc Mw1 Bank Equity Mw2 Mc Mw1 Bank Equity

YDw2 Profits B. Profits F. Safety Margin YDw2 Profits B. Profits F. Safety Margin

interest rate

interest rate

100 200 300 400

6

8

4

2

100 200 300 400

6

8

4

2

100 200 300 400

6

8

4

2

100 200 300 400

-1

1

2

3

100 200 300 400

-1.0

1.0

2.0

3.0

100 200 300 400

0.5

1.0

1.5

2.0

100 200 300 40020

40

60

80

100

100200 300 40020

-20

100

100 200 300 400

80

20

100

60

40

100 200 300 400

0.052

0.046

0.054

0.050

0.048

0.056

0.058

100 200 300 400

0.052

0.046

0.050

0.048

100 200 300 400

0.048

0.045

0.049

0.047

0.046

0.050

40

60

80

GDP Cw1 Cw2 Cc I

100 200 300 400

6

8

4

2

simulation results

Jakob Kapeller

Minsky-Veblen Cycles: Results

38

Debt, Boom, Bust: A Theory of Minsky-Veblen Cycles

Jakob KapellerUniversity of Linz

Department of Philosophy and Theory of Science

jakob.kapeller@jku.at

Bernhard SchützUniversity of Linz

Department of Economics

bernhard.schuetz@jku.at

The basic story

The research questions

1.) Can the recent crisis be interpreted as a part of a larger cycle?2.) Is it possible to create such cycles in a post-Keynesian, stock-flow consistent framework?3.) If yes, what assumptions are sufficient to acquire such a result?

Out

put

Debt

Expansion Compression

Panic

Consolidation

Framework and main assumptions

stock-flow-consistent closed economy model with no state

a Minskyian financial sector, where banks become more confident in stable periods and get more anxious in volatile periods

two classes (workers and capitalists)

two types of workers, where type 2 workers lose income relative to type 1 workers, which gives rise to conspicuous consumption motives that increase the demand for consumer credit and boost aggregate demand

The answer

Expansion

Compression

Panic

Consolidation

A simulation model based on these specs delivers the following cyclical behavior of aggregate output...

...which is accompanied by the expected debt-output cycle (the amount of dots indicates the duration of the respective phase).

Out

put

Debt

7.5

8.0

8.5

9.0

108 110 112 114 116 118

Expansion Compression

Panic

Consolidation 7.5

8.0

8.5

9.0

13.0 13.5 14.0 14.5 15.0 15.5

Out

put

Debt / Output

Expansion

Compression

Panic

Consolidation

Detailed simulation results88 Scenario 1: Baseline Case Scenario 2: Inequality and contraction Scenario 3: Inequality and expansion

200

100

6

8

4

2

100 200 300 400

GDP Cw1 Cw2 Cc I

YDw2 Profits Banks Profits Firms

Mw2 Mc Mw1 Bank Equity

100 200 300 400

0.5

1.0

1.5

2.0

100 200 300 400

20

40

60

80

100

Mw2 Mc Mw1 Bank Equity

100 200 300 400

20

40

60

80

100

Mw2 Mc Mw1 Bank Equity

100 200 300 400

-200

400

200

YDw2 Profits Banks Profits Firms

100 200 300 400

YDw2 Profits Banks Profits Firms

100 200 300 4000.5

1.0

1.5

1

2

3

4

-1

100 200 300 400

GDP Cw1 Cw2 Cc I

6

8

4

2

6

8

4

2

10

100 200 300 400

GDP Cw1 Cw2 Cc I

Scenario 4a: Minsky-Veblen Cycles - Speculative Dynamics

Scenario 4b: Minsky-Veblen Cycles - Ponzi Dynamics

Scenario 4c: Minsky-Veblen Cycles - Hedge Dynamics

GDP Cw1 Cw2 Cc I

YDw2 Profits B. Profits F. Safety Margin

Mw2 Mc Mw1 Bank Equity

interest rate

GDP Cw1 Cw2 Cc I GDP Cw1 Cw2 Cc I

Mw2 Mc Mw1 Bank Equity Mw2 Mc Mw1 Bank Equity

YDw2 Profits B. Profits F. Safety Margin YDw2 Profits B. Profits F. Safety Margin

interest rate

interest rate

100 200 300 400

6

8

4

2

100 200 300 400

6

8

4

2

100 200 300 400

6

8

4

2

100 200 300 400

-1

1

2

3

100 200 300 400

-1.0

1.0

2.0

3.0

100 200 300 400

0.5

1.0

1.5

2.0

100 200 300 40020

40

60

80

100

100200 300 40020

-20

100

100 200 300 400

80

20

100

60

40

100 200 300 400

0.052

0.046

0.054

0.050

0.048

0.056

0.058

100 200 300 400

0.052

0.046

0.050

0.048

100 200 300 400

0.048

0.045

0.049

0.047

0.046

0.050

40

60

80

GDP Cw1 Cw2 Cc I

100 200 300 400

6

8

4

2

Jakob Kapeller

Minsky-Veblen Cycles: Results

38

Debt, Boom, Bust: A Theory of Minsky-Veblen Cycles

Jakob KapellerUniversity of Linz

Department of Philosophy and Theory of Science

jakob.kapeller@jku.at

Bernhard SchützUniversity of Linz

Department of Economics

bernhard.schuetz@jku.at

The basic story

The research questions

1.) Can the recent crisis be interpreted as a part of a larger cycle?2.) Is it possible to create such cycles in a post-Keynesian, stock-flow consistent framework?3.) If yes, what assumptions are sufficient to acquire such a result?

Out

put

Debt

Expansion Compression

Panic

Consolidation

Framework and main assumptions

stock-flow-consistent closed economy model with no state

a Minskyian financial sector, where banks become more confident in stable periods and get more anxious in volatile periods

two classes (workers and capitalists)

two types of workers, where type 2 workers lose income relative to type 1 workers, which gives rise to conspicuous consumption motives that increase the demand for consumer credit and boost aggregate demand

The answer

Expansion

Compression

Panic

Consolidation

A simulation model based on these specs delivers the following cyclical behavior of aggregate output...

...which is accompanied by the expected debt-output cycle (the amount of dots indicates the duration of the respective phase).

Out

put

Debt

7.5

8.0

8.5

9.0

108 110 112 114 116 118

Expansion Compression

Panic

Consolidation 7.5

8.0

8.5

9.0

13.0 13.5 14.0 14.5 15.0 15.5

Out

put

Debt / Output

Expansion

Compression

Panic

Consolidation

Detailed simulation results88 Scenario 1: Baseline Case Scenario 2: Inequality and contraction Scenario 3: Inequality and expansion

200

100

6

8

4

2

100 200 300 400

GDP Cw1 Cw2 Cc I

YDw2 Profits Banks Profits Firms

Mw2 Mc Mw1 Bank Equity

100 200 300 400

0.5

1.0

1.5

2.0

100 200 300 400

20

40

60

80

100

Mw2 Mc Mw1 Bank Equity

100 200 300 400

20

40

60

80

100

Mw2 Mc Mw1 Bank Equity

100 200 300 400

-200

400

200

YDw2 Profits Banks Profits Firms

100 200 300 400

YDw2 Profits Banks Profits Firms

100 200 300 4000.5

1.0

1.5

1

2

3

4

-1

100 200 300 400

GDP Cw1 Cw2 Cc I

6

8

4

2

6

8

4

2

10

100 200 300 400

GDP Cw1 Cw2 Cc I

Scenario 4a: Minsky-Veblen Cycles - Speculative Dynamics

Scenario 4b: Minsky-Veblen Cycles - Ponzi Dynamics

Scenario 4c: Minsky-Veblen Cycles - Hedge Dynamics

GDP Cw1 Cw2 Cc I

YDw2 Profits B. Profits F. Safety Margin

Mw2 Mc Mw1 Bank Equity

interest rate

GDP Cw1 Cw2 Cc I GDP Cw1 Cw2 Cc I

Mw2 Mc Mw1 Bank Equity Mw2 Mc Mw1 Bank Equity

YDw2 Profits B. Profits F. Safety Margin YDw2 Profits B. Profits F. Safety Margin

interest rate

interest rate

100 200 300 400

6

8

4

2

100 200 300 400

6

8

4

2

100 200 300 400

6

8

4

2

100 200 300 400

-1

1

2

3

100 200 300 400

-1.0

1.0

2.0

3.0

100 200 300 400

0.5

1.0

1.5

2.0

100 200 300 40020

40

60

80

100

100200 300 40020

-20

100

100 200 300 400

80

20

100

60

40

100 200 300 400

0.052

0.046

0.054

0.050

0.048

0.056

0.058

100 200 300 400

0.052

0.046

0.050

0.048

100 200 300 400

0.048

0.045

0.049

0.047

0.046

0.050

40

60

80

GDP Cw1 Cw2 Cc I

100 200 300 400

6

8

4

2

Debt, Boom, Bust: A Theory of Minsky-Veblen Cycles

Jakob KapellerUniversity of Linz

Department of Philosophy and Theory of Science

jakob.kapeller@jku.at

Bernhard SchützUniversity of Linz

Department of Economics

bernhard.schuetz@jku.at

The basic story

The research questions

1.) Can the recent crisis be interpreted as a part of a larger cycle?2.) Is it possible to create such cycles in a post-Keynesian, stock-flow consistent framework?3.) If yes, what assumptions are sufficient to acquire such a result?

Out

put

Debt

Expansion Compression

Panic

Consolidation

Framework and main assumptions

stock-flow-consistent closed economy model with no state

a Minskyian financial sector, where banks become more confident in stable periods and get more anxious in volatile periods

two classes (workers and capitalists)

two types of workers, where type 2 workers lose income relative to type 1 workers, which gives rise to conspicuous consumption motives that increase the demand for consumer credit and boost aggregate demand

The answer

Expansion

Compression

Panic

Consolidation

A simulation model based on these specs delivers the following cyclical behavior of aggregate output...

...which is accompanied by the expected debt-output cycle (the amount of dots indicates the duration of the respective phase).

Out

put

Debt

7.5

8.0

8.5

9.0

108 110 112 114 116 118

Expansion Compression

Panic

Consolidation 7.5

8.0

8.5

9.0

13.0 13.5 14.0 14.5 15.0 15.5

Out

put

Debt / Output

Expansion

Compression

Panic

Consolidation

Detailed simulation results88 Scenario 1: Baseline Case Scenario 2: Inequality and contraction Scenario 3: Inequality and expansion

200

100

6

8

4

2

100 200 300 400

GDP Cw1 Cw2 Cc I

YDw2 Profits Banks Profits Firms

Mw2 Mc Mw1 Bank Equity

100 200 300 400

0.5

1.0

1.5

2.0

100 200 300 400

20

40

60

80

100

Mw2 Mc Mw1 Bank Equity

100 200 300 400

20

40

60

80

100

Mw2 Mc Mw1 Bank Equity

100 200 300 400

-200

400

200

YDw2 Profits Banks Profits Firms

100 200 300 400

YDw2 Profits Banks Profits Firms

100 200 300 4000.5

1.0

1.5

1

2

3

4

-1

100 200 300 400

GDP Cw1 Cw2 Cc I

6

8

4

2

6

8

4

2

10

100 200 300 400

GDP Cw1 Cw2 Cc I

Scenario 4a: Minsky-Veblen Cycles - Speculative Dynamics

Scenario 4b: Minsky-Veblen Cycles - Ponzi Dynamics

Scenario 4c: Minsky-Veblen Cycles - Hedge Dynamics

GDP Cw1 Cw2 Cc I

YDw2 Profits B. Profits F. Safety Margin

Mw2 Mc Mw1 Bank Equity

interest rate

GDP Cw1 Cw2 Cc I GDP Cw1 Cw2 Cc I

Mw2 Mc Mw1 Bank Equity Mw2 Mc Mw1 Bank Equity

YDw2 Profits B. Profits F. Safety Margin YDw2 Profits B. Profits F. Safety Margin

interest rate

interest rate

100 200 300 400

6

8

4

2

100 200 300 400

6

8

4

2

100 200 300 400

6

8

4

2

100 200 300 400

-1

1

2

3

100 200 300 400

-1.0

1.0

2.0

3.0

100 200 300 400

0.5

1.0

1.5

2.0

100 200 300 40020

40

60

80

100

100200 300 40020

-20

100

100 200 300 400

80

20

100

60

40

100 200 300 400

0.052

0.046

0.054

0.050

0.048

0.056

0.058

100 200 300 400

0.052

0.046

0.050

0.048

100 200 300 400

0.048

0.045

0.049

0.047

0.046

0.050

40

60

80

GDP Cw1 Cw2 Cc I

100 200 300 400

6

8

4

2

Jakob Kapeller

Diversification: Path-Dependency in Europe Typical trajectories (Debt-NAIRU) and the role of the crisis

39

Total debt/GDP: sum of public debt/GDP (AMECO data) and private sector debt/GDP (OECD data)

Jakob Kapeller

Diversification: Path-Dependency in Europe Typical trajectories (Debt-NAIRU) and the role of the crisis

40

Total debt/GDP: sum of public debt/GDP (AMECO data) and private sector debt/GDP (OECD data)

Debt, Boom, Bust: A Theory of Minsky-Veblen Cycles

Jakob KapellerUniversity of Linz

Department of Philosophy and Theory of Science

jakob.kapeller@jku.at

Bernhard SchützUniversity of Linz

Department of Economics

bernhard.schuetz@jku.at

The basic story

The research questions

1.) Can the recent crisis be interpreted as a part of a larger cycle?2.) Is it possible to create such cycles in a post-Keynesian, stock-flow consistent framework?3.) If yes, what assumptions are sufficient to acquire such a result?

Out

put

Debt

Expansion Compression

Panic

Consolidation

Framework and main assumptions

stock-flow-consistent closed economy model with no state

a Minskyian financial sector, where banks become more confident in stable periods and get more anxious in volatile periods

two classes (workers and capitalists)

two types of workers, where type 2 workers lose income relative to type 1 workers, which gives rise to conspicuous consumption motives that increase the demand for consumer credit and boost aggregate demand

The answer

Expansion

Compression

Panic

Consolidation

A simulation model based on these specs delivers the following cyclical behavior of aggregate output...

...which is accompanied by the expected debt-output cycle (the amount of dots indicates the duration of the respective phase).

Out

put

Debt

7.5

8.0

8.5

9.0

108 110 112 114 116 118

Expansion Compression

Panic

Consolidation 7.5

8.0

8.5

9.0

13.0 13.5 14.0 14.5 15.0 15.5

Out

put

Debt / Output

Expansion

Compression

Panic

Consolidation

Detailed simulation results

88 Scenario 1: Baseline Case Scenario 2: Inequality and contraction Scenario 3: Inequality and expansion

200

100

6

8

4

2

100 200 300 400

GDP Cw1 Cw2 Cc I

YDw2 Profits Banks Profits Firms

Mw2 Mc Mw1 Bank Equity

100 200 300 400

0.5

1.0

1.5

2.0

100 200 300 400

20

40

60

80

100

Mw2 Mc Mw1 Bank Equity

100 200 300 400

20

40

60

80

100

Mw2 Mc Mw1 Bank Equity

100 200 300 400

-200

400

200

YDw2 Profits Banks Profits Firms

100 200 300 400

YDw2 Profits Banks Profits Firms

100 200 300 4000.5

1.0

1.5

1

2

3

4

-1

100 200 300 400

GDP Cw1 Cw2 Cc I

6

8

4

2

6

8

4

2

10

100 200 300 400

GDP Cw1 Cw2 Cc I

Scenario 4a: Minsky-Veblen Cycles - Speculative Dynamics

Scenario 4b: Minsky-Veblen Cycles - Ponzi Dynamics

Scenario 4c: Minsky-Veblen Cycles - Hedge Dynamics

GDP Cw1 Cw2 Cc I

YDw2 Profits B. Profits F. Safety Margin

Mw2 Mc Mw1 Bank Equity

interest rate

GDP Cw1 Cw2 Cc I GDP Cw1 Cw2 Cc I

Mw2 Mc Mw1 Bank Equity Mw2 Mc Mw1 Bank Equity

YDw2 Profits B. Profits F. Safety Margin YDw2 Profits B. Profits F. Safety Margin

interest rate

interest rate

100 200 300 400

6

8

4

2

100 200 300 400

6

8

4

2

100 200 300 400

6

8

4

2

100 200 300 400

-1

1

2

3

100 200 300 400

-1.0

1.0

2.0

3.0

100 200 300 400

0.5

1.0

1.5

2.0

100 200 300 40020

40

60

80

100

100200 300 40020

-20

100

100 200 300 400

80

20

100

60

40

100 200 300 400

0.052

0.046

0.054

0.050

0.048

0.056

0.058

100 200 300 400

0.052

0.046

0.050

0.048

100 200 300 400

0.048

0.045

0.049

0.047

0.046

0.050

40

60

80

GDP Cw1 Cw2 Cc I

100 200 300 400

6

8

4

2

Jakob Kapeller

Diversification: Path-Dependency in Europe Keynesian Macro + complexity-inspired visualization

41

Jakob Kapeller

Diversification: Path-Dependency in Europe Keynesian Macro + complexity-inspired visualization

41

highly financialized countries

Jakob Kapeller

Diversification: Path-Dependency in Europe Keynesian Macro + complexity-inspired visualization

41

highly financialized countries

path of hope

Jakob Kapeller

Diversification: Path-Dependency in Europe Keynesian Macro + complexity-inspired visualization

41

highly financialized countries

path of hope

valley of d

espair

Jakob Kapeller

Conclusion

• Pluralist approach leads to new contributions/perspectives

• Integration of different traditions: New Perspectives!

• pluralism ≠ anything goes.

• Obvious example in complexity econ: Keynes-Schumpeter models (e.g. Dosi et al.)

• Pluralist economics in practice: the new heterodoxy?

• Post-Keynesianism + Old Institutionalism ➝ Minsky-Veblen Cycles

• + complexity economics ➝ Polarization in Europe

• (+ economic sociology ➝ Performativity! Role of models in policy-making!)

• (+ heterodox trade theory ➝ path-dependency in supply-side structures!)

• … [many more things]

42

Many thanks for your attention!