Marc Lavoie History and Methods of Post Keynesian Economics 184458

A Modern Guide to Keynesian Macroeconomics and Economic Policies

Edited by

Eckhard HeinBerlin School o f Economics and Law, GermanyEngelbert StockhammerKingston University, UK

Edward ElgarCheltenham, U K Northampton, MA, USA

1. History and methods of post- Keynesian economicsMarc Lavoie

1. INTRODUCTION

Presenting the history and methods of post-Keynesian economics is a feat that can hardly be accomplished in a short essay, and so I start right away by giving the outline o f this chapter. In the next section I go over the founding institutional moments o f post-Keynesian economics, and discuss its evolution. In the third section, I set post-Keynesian economics as being part o f a larger group of heterodox schools o f thought in economics. I briefly describe their common presuppositions relative to those of orthodox economics and I identify the specific features of post- Keynesian economics, relative to other heterodox schools. In the fourth section, I delineate the various streams of thought within post-Keynesian economics. In the fifth section, I mention some of the debates that have rocked post-Keynesian economics, and in the sixth section I conclude by discussing some of the issues that may affect post-Keynesian economics in the future.

2. HISTORY AND EVOLUTION OF POST- KEYNESIAN ECONOMICS

2.1 The Beginnings

I will take no risk and start the history of post-Keynesian economics at the time o f the publication of J.M. Keyness General Theory, in 1936, as did John King (2002) in his book on the subject. The General Theory was preceded by Keyness Treatise on Money (1930), which already contained many o f the seeds of the Keynesian revolution. In particular, the Treatise contains the widows cruse parable, which later gave rise to the Cambridge theories o f growth and distribution. It also incorporated the banana parable, which illustrates the paradoxical consequences of

1

A modem guide to Keynesian macroeconomics and economic policies

thrift campaign in a monetary economy. The campaign yields larger ousehold saving deposits at banks, but the counterpart of these savings is ic financial losses o f firms induced by the low banana price. Firms have ) take loans to cover their losses, with no increase in the wealth o f the n tire community.The 1930s are full of these paradoxical macroeconomic relationships

lat are the bread and butter of post-Keynesian economics. Michal 1 alecki, the Polish economist, in a series o f articles reproduced in Kalecki ! 969), reversed the positive aspects of Adam Smiths invisible hand by rguing that one o f the main features o f the capitalist system is the fact hat what is to the advantage of a single entrepreneur does not necessar- y benefit all entrepreneurs as a class (1969, p. 26), since wage reductions issipate themselves in price reductions or output reductions, thus either aising the real burden of their debt or decreasing their rates of capacity uilisation. He further argiiedJJaat~t^^^savJuag..or larger government 11rpluses reduae-COxnco.teuDiDj&ts>^alLthe,s.e.ldeasJbein g found today in >ost-Keynesian economics. _

Tl^revoTutionary character of the General Theory, as understood by nembers o f the Circus, this small group o f young economists that met egularly to discuss The Treatise on Money, attracted several economists mtside Cambridge; for instance, Abba Lerner (1943), the proponent of t'unctional finance, who very early on argued against sound finance ind in favour of very active fiscal policy, as do the neo-chartalist post- iveynesians now. Another important convert wasJNicholas Kaldor (1934). vho w rntf-an-artidp mn the possible indeterminateness of equilibrium, ii^ussma-mtf>M-lity rrmJtiplp equilibria and patlPdependenfequilibrium, ill themes that became key features of post-Keynesian economics.

The second key moment in the history o f post-Keynesian economics may be the simultaneous discovery by Kaldor (1956) and Robinson (1956) of the Cambridge (or neo-Keynesian) theory of growth and distribution.) he key feature of thisLiJifiogy^^kat thft profi4-rntfi is-mot dr.tnmnad-hy technical factors or marginal productivity but bv purely macroeconomic i actors, the rate o fjro w th of the. em nam u.and the propensity to save ^ o r p r o F ts7This was perhaps the first time the Cambridge economists became aware that the kind of theory being discussed at Cambridge was different from mainstream theory elsewhere. Robinsons (1956) book, fhe Accumulation o f Capital, was a remarkable achievement, covering i he dynamic long-run implications of the Keynesian revolution, inspired by the previous work of Roy Harrod and Michal Kalecki, the revival of classical questions as found in the work of Pierro Sraffa, plus the work of Swedish economists Gunnar Myrdal and Knut Wicksell, probably under the advice of Richard Kahn, also a former member o f the Circus. The

book provided a modem view o f money and credit, after a series of chapters devoted to the .difficult issue of growth and technical choice,

The implications o f technical choice were at the core of the Cambridge capital controversies that erupted in the 1960s. The controversy was launched with Robinsons (1953-54) article on the aggregate neoclassical production function, but its origins go as far back as Sraffas (1926) paper on the shape o f Marshallian cost curves, reconfigured in his Sook on the Production o f Commodities by Means o f Commodities (1960), the implications o f which took a long time to be understood. Tiago M ata(2004), probably justifiably so, considers these as a defining moment in the construction of the post-Keynesian identity. Indeed the capital controversies were ortf w ry f^ai^^sia iaris .u/han. ma-i dicfengage in a debate with its outside critiques. Tt happened hecause the U.K. Cambridge work onfixed-coefficient models pursued by Robinson and Sraffa had a mirror image in the M IT Cambridge work on activity analysis, also based on fixed coefficients (Dorfman et al., 1958). Frustrated with Robinsons critiques (during her 1961 visit to MIT) o f the neoclassical production function with factor substitution and aggregate capital used notably by his colleague Robert Solow, Paul Samuelson (1962) dashed forward to demonstrate that it was possible to build a fixed- coefficient model, with several techniques and capital goods, that would yield the same results as the standard aggregate production function. T o r several years everyone (except Piero Garegnani) was somewhat baffled (Robinson, 1975, p. 37).

It was then realised that Samuel snns mndpl was a special case, as he assumed the same capital to lahrmr r p ( i r anir,fl)ly flm assumption that he wrongly *Utrib^fH Tn general.in such fixed-coefficient models with several techniques and heterogeneous capital goods, there is no necessary negative relationship between the profit rate and the value of capital per head, in contrast to what one would expect from neoclassical theory. It was known since Wicksell that a positive relationship could occur because of price revaluation effects, but this was not considered damaging to neoclassical theory. By contrast, the discovery of reswitdiinpL^ u l kuI LA| irf.i.1 'irvwtnfll j o ev-a-nce of the aggregate production function. In both cases^ an infinitely small decrease in the profit rate can lead to the adoption o f a technique with ^lower capital per head. This renders meaningless the neoclassical concepts o f input substitution as well as that of capital or labour scarcity, and hence it questions the validity o f demand and supply analysis since long- run equilibria may not be stable anymore. All this was quickly recognised by Samuelson (1966), and a ped_aeogical summary o f the main issues was provided by Scott Moss (1980).

History and methods o f post-Keynesian economics 3

The capital controversies had three fallouts. First the Sraffian choice of technique apparatus was turned against Marxian analysis. In particular Ian Steedmans (1977) book convinced many to abandon Marxist value theory. This probably constituted the peak of Sraffas influence, with Sraffian price theory acting as a substitute for the labour theory of value and neoclassical price theory. Indeed, Pasinettis (1981) model of vertically integrated sectors, based on direct, indirect and hyper-indirect labour, was the ultimate attempt to provide a sophisticated and consistent labour- based theory of value. Second, it was gradually recognised among the participants and their readers that most of the debates had occurred within a highly abstract model, that assumed cost minimization and full information; but this model had little relevance to actual technological changes in historical time (Robinson, 1975; 1981, p. 126). The model thiits appeared overly formalistic and sterile in policy terms. As a result a number of heterodox economists became persuaded that time was too precious to be thus occupied for an entire career (Hodgson, 1988, p. xvi). Third, some defenders of neoclassical theory started to claim that neoclassical production and capital theories had been vindicated by the large number of successful regressions with good fits. This empitjr.al defend of nendflssical_conomics was questioned

however when AnwaiLShaiJk-h-(1974) showed--thatJ:hesj:egressiojis did little"Besides replicating the nationaLaccount identities. Regressing data which, by construction, have not been drawn from a neoclassical production function, yields good statistical fits of these hypothetical aggregate production functions. More recently, John McCombie (2001) has made

/ a reductio ad absurdum demonstration that annihilates this last-stand defence. Starting with firms that, by assumption, have a Cobb-Douglas technology with a capital output elasticity of approximately 0.75, the regression.onphysicaLdata yields coefficients that are consistent with this elasticity value. However, things are different when regressions are run on deflated values, as they must be in macroeconomics and in most

/ industrial studies. With an assumed share of pr-o-ftes- of 25 per cent, thef regression coefficient that pertains to measure the capital output elasticity

yields instead a value around_0,25 - a value that corresponris to the-share .of profits imbedded in the data by construction. This experiment confirms

v that regressions on production functions estimate profit and wage shares in national income instead of elasticities of factors of production, just asShaikh had claimed earlier..Thus, econometric work around aggregateproduction functions cannot provide information about the kind of technology in use or about factor elasticities. All empirical results based on these neoclassical functions or their derivatives are meaningless. They are

i artefacts.

4 A modern guide to Keynesian macroeconomics and economic policies


2.2 Institutionalisation

While U.K. Cambridge was battling with M IT Cambridge, other American economists came to realise that their views on price inflation (cost led) and on monetary theory (endogenous money and the rejection of the quantity theory of money) were quite consistent with those held by Robinson and her Cambridge colleagues, Kahn and Kaldor. Sidney W ein trtfb discovered this in 1961, three years after having written a hnnkdhat

by his fellow Americans. Eventually he also realised that his macro equations were similar to those of Kalecki, which he called the KKR, the Kalecki-Kaldor-Robinson equations. W eintraubs former student, Paul Davidson, also started to examine the Cambridge growth and distribution models. Davidson scent his 1970-71 sabbatical in Cambridge, where he met. Basil Moore, carrying there the draft of his hook. Money and the Real World (1972) - an attempt to introduce money explicitly into the Cambridge growth K regel.to Cambridge, which led to Kregels own synthesis. The Reconstruction o / the Keynesian and theSraffian strands. -

Exchanges were going both ways. Joan Robinson (1973) was invited to give the Richard T. Ely lecture - titled T h e second crisis of economic theory - at the American Economic Association meeting in New Orleans in December 1971, when the Association was being chaired by John Kenneth Galbraith. Her visit was the occasion to organise a meeting with those dis-

/ satisfied with orthodox economics. From the meeting arose a book devoted to the revival of political economy (Nell, 19.80), where radical economists

v (linked to the newly created Union for Radical Political Economy, URPE) V and less radical heteredi32L^ Qnmttj&fcU ain& dJa ^^\ (Lee. 20QQa. 200Qb I it annears that Robinsons presence gave an impetus

to non-radical heterodox economists in the U. S. to organise themselves. This was done mainly under the dynamic leadership of Alfred Eichner, who is best known for his book on The Megacorp and the Oligopoly (1976) and for having edited A Guide to Post-Keynesian Economics (1979).

A key factor to the institutionalisation of post-K fynnian pfifmPHFmr ^in my view, was the article that Eichner and Kregel (1975) managed to get published in ^ x ^ ^ r ^ < i .. iaum n L,aL.Economic Literature. Eichner and Kregel argued fperham o^d\Lmthn^asiicalhL)Jhat.a...new..paradigm was in the making. Their contribution was to clarify that post-Keynesian theory was much more than a negative critique of the neoclassical theory of capital; They described the new school with the following elements, which probably still apply now:

rthe purpose o f theory is to explain the real world as observed empirically (Eichner and Kregel, 1975, p. 1309) rather than finding out how far one can get by assuming an ideal world; a microeconomic base made up of imperfect markets with oligopolies and non-increasing marginal costs;a world of incomplete information, based on the past, with an uncertain future; a concern for history and time;

a concern for growth and cycles; a monetised production economy; the principle that saving adjusts to discretionary expenditures

(investment); a Cambridge theory of income distribution, with institutional/

elements.

The institutionalisation o f the new paradigm - post-Keynesian economics - was soon pursued with the creation of two journals. Young economists at Cambridge created the Cambridge Journal o f Economics in 1977, rooted in the traditions o f Marx, Kalecki and Keynes and inspired by a Cambridge tradition exemplified by the theoretical work of Dobb, Kaldor and Robinson, and by the empirical work undertaken at the Department of Applied Economics,1 running it as a kind of cooperative (M ata, 2006, p. 30). One year later, Sidney Weintraub and Paul Davidson started running the Journal o f Post Keynesian Economics, which was said to be informed by the works of Keynes, Robinson, Kahn, Kalecki, Lerner, Harrod, Galbraith, Minsky and the new Hicks.2 These two journals have published the bulk o f post-Keynesian articles for more than 30 years, and whatever complaints can be brought against the editorial choices, an en ojr mously rinh 1itffrntvrf> Hp found in these journals.

In the mid 1970s and early 1980s many important articles were published in the Thames Papers in Political Economy, which were run by Thanos Skouras and Philip Arestis. These were a series of individual papers, presented in a neat format, but not a journal.3 British post-Keynesians then felt that they ought to have their own heterodox Keynesian journal (Lee, 2007). A methodologist, John Pheby, created such a journal in 1989, which he first meant to call the Review o f Post-Keynesian Economics, but he was dissuaded from doing so by Paul Davidson, and the journal was finally called theJieyjpw n f Political Economy (RoPEV Pheby went on to create another journal, and, ironically, after a failed coup and some

A modern guide to Keynesian macroeconomics and economic policies

reshuffling of the board of editors, the~editorsffip-of~the journal was relo- cated in the United States, with Gary Mongiovi and Steve Pressman at its helm.

History and methods of post-Keynesian economics 7

Another effort at institutionalisation was being pursued at about the same time in Europe, under the guise of the Trieste summer schools and conferences, which occurred each year from 1981 to 1990 in a hotel next to the Italian Adriatic Sea. This school was run by a triumvirate made up of Jan Kregel, Pierangelo Garegnani and Sergio Parinello. The purpose of the school, besides bringing established and young researchers together, was to promote a fruitful alternative to neoclassical economicsg|feat would be based on a synthesis o f the Keynesian monetary production economy and the Sraffian surplus approach. In a way, the school was a success, as it helped everyone to identify the difficulties inherent in such a project and as it aided young researchers to forge links with each other. However, from another angle, the school is often considered as a relative failure, as little progress was made towards a rapprochement between the two main streams of post-Keynesian economics. Indeed, the debates kept repeating themselves, gravitating around the protagonists holding the most extreme positions, so that the commonalities between the two streams emphasised by the more ecumenical participants were left out in the cold (Arena, 1987; King, 2002, p. 158).

Other systematic efforts at promoting post-Keynesian economics were also under way. Several sets of conferences or summer schools were organised, starting in the late 1980s. In 1987, John Pheby organised the first o f his nine Great Malvern conferences, one goal o f which was to feed articles towards his newly created journal. These small conferences, located next to the Malvern Hills in England, were highly successful in attracting heterodox authors of various strands (Pressman, 1996). In 1990, Davidson and Kregel launched a (nearly) biennial summer school and conference, held at Davidsons University of Tennessee in Knoxville. From 2002 to 2008 this event was moved to the University of Missouri in Kansas City, with Randall Wray and Jan Kregel as the main organisers, and then moved again in 2010 to the Levy Institute at Bard College, U.S., now taking the name of the Hyman P. Minsky Summer Seminar - a quite fitting change given the advent of the global financial crisis. The Levy Institute think-tank has for a long time been a refuge for post-Keynesian economists, thanks to the tight New School links of is president, Dimitri Papadimitriou, with Hyman Minsky and Wynne Godley having been main researchers there.

Despite all this, the institutionalisation o f post-Keynesian economics occurred much more slowly than radical, institutional, social or behavioural economics. There is still no international post-Keynesian association, and there is no American organisation, similar say to AFEE, ASE or URPE for institutionalists, social economists and radical economists.4 British post-Keynesians, despite their numbers, were also relatively


slow to institutionalise formally. They finally transformed an informal group with its newsletter and workshops into a formal organisation, the Post-Keynesian Economics Study Group (PKESG), with memberships and websites. The French, with Edwin Le Hron, created the ADEK, the Association pour le Dveloppement des tudes Keynsiennes; the Brazilians created a similar Associao Keynesiana Brasileiro (AKB); and there is the Japanese Society for Post Keynesian Economics. Over the years, several successful initiatives have been taken to help institutionalise post-Keynesian economics. There are now regular post-Keynesian conferences in Dijon, Bilbao and Berlin, plus the frequent workshops organised by the PKESG in Britain. The present book is the outcome of the initiative of Eckhard Hein and Engelbert Stockhammer in creating the Berlin post- Keynesian summer school in 2008, now to be run in alternate years with the post-Keynesian summer school in the United States. This initiative is a fallout of the Research Network Macroeconomics and Macroeconomic Policies, the purpose o f which is to promote Keynesian economics in Germany and elsewhere (Hein and Priewe, 2009).

In addition, on the publish or perish front, several other journals are now edited by post-Keynesians or editors friendly to post-Keynesian economics. This has been the case for a long time for journals like the International Review o f Applied Economics, conomie Applique, Metroeconomica, the Review o f Radical Political Economics and the Journal o f Economic Behaviour and Organisation, and is now the case more recently for journals such as Intervention. European Journal o f Economics and Economic Policies, the International Journal o f Political Economy, the Journal o f Income Distribution and many others appearing in the Heterodox Economics Directory first compiled by Frederic Lee (2004). Indeed, to the institutionalisation process of post-Keynesian economics mentioned above one should add, at a more general level, the electronic sources of information provided until 2009 by Frederic Lee with his Heterodox Economics Newsletter, along with the Real-World Economics Review edited by Edward Fullbrook.5

3. POST-KEYNESIAN ECONOMICS WITHIN HETERODOX ECONOMICS

Many allusions have so far been made to orthodox or to heterodox economics, without attempting to define those two terms. Heterodox economics is now the fashionable expression to describe the set o f numerous non-orthodox schools of thought that have emerged through time, replacing previous names such as Radical Political Economy. Orthodox


economics is also known as the dominant paradigm, the mainstream or neoclassical economics. Over the last few years, however, a number of economists have claimed that the expression neoclassical economics is no longer appropriate, because so many of the standard neoclassical assumptions have been given up by some of its cutting-edge followers (Colander, 2000; Davis, 2006). This element of dissent and change withinneoclassical economics has created a bit of confusion regarding the typoldffy of schools of thought.

Fortunately, Roger Backhouse (2004) has provided useful distinctions. Economists can be divided into two broad groups: the mainstream and the dissenters. The mainstream essentially corresponds to the textbook view, as found in intermediate and advanced textbooks. As to the dissenters, they can be subdivided into two additional groups: the orthodox dissenters and the heterodox dissenters. Orthodox dissenters would have included Milton Friedman, before Monetarism became fashionable, or the so- called New Consensus model, before it became the bread and butter of central banks. Other examples of orthodox dissent may include the work of authors as diverse as Robert Shiller, Richard Thaler, Colin Camerer, Harvey Leibenstein, Dani Rodrick, George Akerlof, Paul Krugman, Joseph Stiglitz, and Oliver Williamson and the New Institutionalists. Despite their (sometimes) harsh criticisms of the mainstream, they do not want to part with neoclassical economics: they only wish to improve it. Orthodox dissenters are typically trying to change particular ideas rather than engaging in root and branch rejection of conventional ideas (Backhouse, 2004, p. 265).

Backhouse (2004) includes schools of thought such as the post- Keynesians, the Marxists and the Radicals among the heterodox dissenters. But several other schools can be added: the French Regulation school and its American kin, the Social Structure of Accumulation school; the Monetary Circuit schools and Old Institutionalists; Social economics and Humanistic economics, along with the Anti-utilitarism school; Feminist economics and Ecological economics; part of Evolutionary economics and Schumpeterian economics; part of System Dynamics; part of Behavioural economics, and many others; Ghandi economics, Henry George economics, Gesell economics, and so on. The variety of heterodox schools is staggering.

Heterodox economists are more than mere dissenters or critics o f the mainstream. As D utt (2003, p. 58) points out, heterodox approaches do not merely have a negative dimension but also have a positive one. Frederic Lee argues that heterodox economists form a tight community, with several institutional and theoretical ties between the members of the various schools. In particular, if mainstream economics suddenly


disappeared, heterodox economics would be largely unaffected (Lee, 2008, p. 5), meaning that heterodox economics is not the dual to neoclassical economics, but an alternative to it, as I have myself tried to show elsewhere (Lavoie, 2006a). I disagree with the claim, often heard, that the only true common feature of heterodox economics is its opposition to neoclassical or mainstream economics. In my opinion, there are broad features that characterise heterodox schools in a positive and essential way. In contrast to assumptions or hypotheses that can be added or dropped, there are informal postulates that are beyond question. These presuppositions of a research programme are metaphysical elements which are often left implicit (Fulton, 1984, p. 193). They are grand generalities that reflect philosophical and methodological opinions and beliefs.

The commonalities in the presuppositions of the heterodox schools of thought have not always been easy to perceive for at least two reasons. First, there has been an explosion of published works, both in the standard outlets (books, journals) and as online material, making it impossible to keep track of a wide array o f work. Heterodox schools do have commonalities, but these are hidden by their fields of specialisation. The second force contributing to the break-up of heterodox economics is product differentiation. Economists tend to emphasise the originality of their contribution, and to minimise the similarities with previous or current works, so as to prop up their own production. This, as pointed out by Pasinetti (2007, pp. 37-41), can give rise to arrogant5 and doctrinaire behaviour that creates an imbalance towards the destructive rather than towards the constructive aspects.

On the other hand, there have always been some centripetal forces, with many authors looking for interactions and rapprochements. As pointed out by Lee (2000a) there was a good deal o f sympathy for post- Keynesian economics among the executives of URPE, AFEE and ASE and the journals of these associations. With the fall of the Berlin wall and the end of Eastern communist regimes, there has been a renewed interest in linking up the various heterodox groups. A notable project in this regard has been the effort o f Phil O H ara (1999) in getting off the ground an Encyclopedia o f Political Economy, which brought together at least five heterodox schools of thought. There is no doubt that the centripetal forces, as reflected in the creation of pluralistic heterodox organisations, have been driven by the deterioration of the academic power of the various heterodox schools, likened to minorities in peril. But more positively, the centripetal movement can also be attributed to the intellectual curiosity of the more recent generations of researchers, brought up under a variety of traditions instead of being only exposed to a single school, as evidenced in the efforts to understand the current financial crisis.


Table L I Presuppositions o f the heterodox and orthodox research programmes

Presupposition Heterodox schools Orthodox schools

Epistemology/OntologyMethodRationality

Economic core

Political core

RealismHolism, organicism Reasonable rationality, satisficing agent

Production, growth

Regulated markets

Instrum^alisrii - Individualism, atomicism Hyper model-consistent rationality, optimising agentExchange, allocation, scarcityUnfettered markets

3.1 The Presuppositions of Heterodox Economics

But what do these alternatives have in common? Table 1.1 summarises my findings, which offer, I hope, a fair representation of the key methodological issues and beliefs that separate heterodox from orthodox economics. Heterodox economics is based on realism, some degree of organicism, reasonable rationality and satisficing agents, a concern with production and growth, and a belief in the need for regulated markets.

Tony Lawson (1994) has been arguing for a long time that realism is the key methodological distinguishing feature, claiming that any other distinguishing factor derives from this one - a claim which is tempting to accept. While realism can be interpreted in many different ways, there is an agreement that the analysis must start with first approximations of the real world, not an idealistic one. This is a complete opposite of state-of- the-art orthodox models. For instance, when Bliss (1975, p. 301) presents the inter-temporal general equilibrium model, which is the twin of the now popular dynamic stochastic general equilibrium model, he claims that of course, that model does not serve to represent reality and that is not its purpose.

Orthodox economists strive under instrumentalism, that is, the belief that an assumption is sound for two reasons: first it allows making precise predictions, and second it helps to calculate the value of an equilibrium position. Whether the assumption is realistic or not is irrelevant; ultimately, whether the prediction is accurate or not is also irrelevant. Good examples of this are the use of aggregate production functions and the use of the Gaussian copula function to price collaterised debt obligations instead of relying on actual defaulting risk data. When confronted, orthodox economists respond that it is better to use artefact elasticities or

12 A modem guide to Keynesian macroeconomics and economic policies

synthetic prices than nothing at all. By contrast, post-Keynesians believe it is better to develop a model which emphasises the special characteristics of the economic world in which we live than to continually refine and polish a beautifully precise, but irrelevant model (Davidson, 1984, p. 574).

Closely related to realism and instrumentalism is the kind of rationality which is assumed in our economic models. Following the rational expectations revolution, the only type of rationality admissible to mainstream economists is model-consistent rationality. N ot only are economic agents assumed to know all contingencies, from now to infinity, but they are assumed to know how the world operates. Despite the fact that economists have been arguing with each other for centuries about the proper representation o f the economy, orthodox theorists assume that there is a single accepted model of the economy out there and that everyone agrees about how it functions. It is true that Behavioural economics has tried to modify this, but they have made little headway in the more reputable journals, and in my view a large segment of the dissident Behavioural economics must be classified under the umbrella of heterodox economics, which deals with what I have called reasonable rationality, also referred to as sensible economic expectations (Davidson, 2003, p. 432).

The third pair of presuppositions concerns methodological individualism or atomicism versus holism or organicism. Atomicism, as practised by neoclassical economists, has a long history. Voltaire, in his famous Candide novel, was already making fun through his Pangloss character o f those who, like Leibnitz, thought that non-interacting monads ensure that we live in the best of all possible worlds. There is certainly a great deal of similarity with the neoclassical claim that all analysis must start at the level of the optimising individual and that price competition between free atomistic firms will generate a Pareto optimum. By contrast heterodox authors have taken a more holistic approach. In particular, they pay attention to the possibility of macroeconomic paradoxes, or fallacies of composition, that contradict the pure aggregation of a representative agent. By way of example, we may think o f the seven paradoxes noted by various post-Keynesian authors and listed in Table 1.2, all of which are highly relevant to the financial crisis that has precipitated the current world recession.

About the fourth pair of suppositions, I will quickly point out that the most common definition o f economics in orthodox textbooks is the study of the efficient allocation of scarce resources. Exchange o f endowments and substitution effects here play a key role. By contrast, heterodox economists are mostly concerned with the degree of utilisation o f existing resources, the causes and the consequences of growth, and the ability of the economic system to create a surplus. They dont assume that resources are fully utilised.

History and methods o f post-Keynesian economics

Table 1.2 Holism: some crisis-related macro paradoxes

13

Paradox of thrift (Keynes, 1936) Paradox of costs (Rowthorn, 1981)

Paradox of public deficits (Kalecki, 1971)

Paradox of debt (Steindl, 1952)

Paradox of tranquillity (Minsky, 1975)

Paradox of liquidity (Nesvetailova, 2007)

Paradox of risk (Wojnilower,19S0)

Higher saving rates lead to reduced output Higher real wages lead to higher profit

rates # Government deficits raise private profits

Efforts to de-leverage might lead to higher leverage ratios Stability is destabilising

New ways to create liquidity end up transforming liquid assets into illiquid ones The availability of individual risk cover leads to more risk overall

This leads us to the fifth and last o f our key presuppositions, that of the role of markets relative to the role of the State. Mainstream economists exhibit great confidence in the ability o f unregulated markets to deliver stability, full employment and static allocation efficiency. By contrast heterodox economists are very much distrustful of unfettered markets. While recognising, with Schumpeter, the dynamism imparted by entrepreneurship in a capitalist system, they question the wisdom of blindly relying on markets. They suspect their unfairness, their inability to self-regulate, their tendency for destabilising paths, their squandering of resources. Furthermore, heterodox economists believe that unbridled prices - highly flexible prices - generate instability rather than stability. By contrast, sticky prices with some inertia are more likely to generate stability. Thus they believe that State regulation is needed, both at the micro and macro levels, as the costs of such government intervention are dwarfed compared with the costs of unregulated capital. This fifth presupposition had been identified very clearly by Keynes (1973, xiii, pp. 486-487) himself 75 years ago, when he said that he sided with those who reject that idea that the existing economic system is, in any significant sense, self-adjusting.; To close this section, it might be worth reiterating that some important methodologists have an alternative view of what distinguishes orthodox and heterodox economics. Lately, Lawson (2009, p. 762) has somewhat changed his focus by arguing that mainstream analysis is identifiable by its inclination to mathematise, its insistence that mathematical modelling is the only useful, and the proper, way to do economics. I would rather side with Amitava D utt (2003, p. 58) in saying that what characterises both the mainstream and the orthodox dissenters is their reliance on "the use o f the


optimizing agent instead o f empirically-based behavioural relations. It is the insistence on modelling and on this straitjacket of individual optimisation that heterodox authors turn down.

Another defining dichotomy has been put forth by Lawson (1997) and Dow (2000). Heterodoxy would entail a belief in open systems, while orthodox economics would deal with closed systems. I have never been able to convince myself of the usefulness of such a dichotomy, even though some famous writers seem to approve of it. The distinction has been used by Stephen Pratten (1996) to argue that Sraffian economics was based on a law-like closed system, and therefore out of heterodoxy, despite the well- known fact that the profit rate in the Sraffian system is left up in the air, with no definite determinant. The closed/open system dichotomy has also been used by Downward (2000) to argue that target-return pricing is not a truly heterodox theory because it yields a determinate pricing formula, despite its kinship with Kaleckis or Gardiner Meanss open pricing proposals. Such pronouncements seem so obviously misleading that their open/closed basis cannot provide much useful information, a point also made earlier by John Smithin (2004, pp. 67-70).

3.2 The Presuppositions of Post-Keynesian Economics

A difficult question, that keeps haunting post-Keynesian economists, is what are the contours of post-Keynesianism? A recurrent question is whether the Sraffian school should or should not be included within post-Keynesianism. We will come back to this question in the next section. But there are other contour questions which are just as mesmerising. Should we say that the French Regulation school is part of the post-Keynesian school, since regulation authors use so many behavioural equations taken from Cambridge Keynesians, or should we say instead that post-Keynesianism is part of the Regulation school, since the latter takes a wider historical and institutional approach to analyse economic systems? Furthermore, what are the links between Radical Marxists and post-Keynesians? Is it that the Radicals focus on the cycles while post-Keynesians of the Cambridge variety have focused on trend growth? There are no easy answers. Personally, when analysing the contours of the post-Keynesian school, I tend to favour a broad tent approach. I am a lumper more than a splitter, to use the expressions proposed by M earman (2009a), or in the words of King (2002, p. 214), a synthesizer.

There have been many proposals identifying the key characteristics of post-Keynesian economics since the first attempt by Eichner and Kregel (1975). A survey of these attempts yields Table 1.3.


Table 1.3 Presuppositions and key characteristics o f post-Keynesianeconomics

Concept Authors endorsing the concept

Realism

Organicism

Reasonablerationality

Production

Disequilibria,instability

Principle of effective demand

Investment causes saving

Institutions make a difference

Monetised economy

Historical and irreversible time

Non-ergodicityFundamental

uncertainty

Power relations Open systems Pluralism Social concerns

Arestis (1990, 1992,1996), Arestis and Sawyer (1993), Chick (1995), Dostaler (1988), Dow (1991), Fontana (2009), Holt (2009), Jespersen (2009), Pasifeti (2007), Setterfield (2003)Arestis (1992), Arestis and Sawyer (1993), Chick (1995), Dow (1991), Jespersen (2009), Pasinetti (2007),Setterfield (2003)Arestis (1992, 1996), Brown (1981)

Arestis and Sawyer (1993), Dow (1991), Henry and Seccareccia (1982), Setterfield (2003)Arestis and Sawyer (1993), Brown (1981), Fontana and Gerrard (2006), Galbraith (1978), Lavoie (2006b),Palley (1996)Arestis and Sawyer (1993), Arestis et al. (1999), Fontana and Gerrard (2006), Galbraith (1978), Jespersen (2009), Lavoie (2006b), Palley (1996)Dostaler (1988), Henry (1993), Henry and Seccareccia (1982), Palley (1996), Pasinetti (2007)Arestis (1990), Arestis et al. (1999), Danby (2009),Dow (1991), Fontana and Gerrard (2006), Holt (2009), Jespersen (2009)Arestis et al. (1999), Davidson (1982), Dostaler (1988), Dow (1991), Fontana (2009), Jespersen (2009),Lavoie (2006b)Arestis (1990, 1992), Arestis and Sawyer (1993), Chick (1995), Danby (2009), Davidson (1982), Fontana (2009), Henry (1993), Henry and Seccareccia (1982), Holt (2009), Lavoie (2006b), Pasinetti (2007)Dow (2005), Pasinetti (2007)Arestis (1990, 1992, 1996), Arestis and Sawyer (1993), Danby (2009), Davidson (1982), Fontana (2009), Holt (2009), Jespersen (2009), Lavoie (2006b), Pasinetti (2007) Davidson (1982), Dostaler (1988)Brown (1981), Dow (1991, 2005), Jespersen (2009)Dow (1991, 2005), Lavoie (2006b)Arestis (1990), Pasinetti (2007)

The presuppositions of post-Keynesian analysis can be divided into four groupings. The first five characteristics o f Table 1.3 (realism, organicism, reasonable rationality, production, disequilibria and instability) correspond to what I have called the presuppositions of the more general heterodox paradigm. This is not surprising since post-Keynesian economics is part of heterodox economics, and hence, as such, should share its presuppositions. The only characteristic in need of some explanation is the fifth one, which in Table 1.3 was described as regulated markets and which here is presented as disequilibria and instability. Post-Keynesian authors often consider that there are endogenous destabilising forces at work and that price mechanisms cannot in general counteract these. As a result, multiple equilibria may arise, including o f course situations of unemployment, so that government intervention and the regulation of market forces are required.

The next set of presuppositions is more specific to post-Keynesian economics: it is made up of three inter-related features: the principle of effective demand, the causality running from investment to saving, and the claim that institutions are important and do make a difference. The principle of effective demand says that aggregate demand is the main force that determines output and employment.6 But while most economists would agree or concede that the economy is demand led in the short run, few would agree with the claim that the economy is demand led even in the long run, and thus the assertion that the economy is demand led both in the short and the long run is most likely a specific feature o f post-Keynesianism. More concretely, this means that post-Keynesians believe that the actual path taken by the economy has an impact on the supply-side determinants of long-run growth. The statement that investment determines saving is intimately linked to the principle of effective demand, and thus it is no surprise to see some authors underlining this causality as a key feature of post-Keynesianism. Indeed, as pointed out by Nina Shapiro (1977), the autonomy of investment from the inter-temporal decisions of households is most likely the revolutionary feature of post-Keynesian economics. This is even clearer now than it was then, with the focus of state-of-the-art orthodox macroeconomics on the representative agent and her maximisation of inter-temporal utility. Also connected to all this is the belief that institutions do make a difference, meaning within the narrower context of the principle of effective demand that fiscal and monetary policies do have an impact on real quantities, both in the short and the long run.

The third set of presuppositions might also be specific to post- Keynesianism. It brings together a monetised economy, the importance of historical and irreversible time, the concept of non-ergodicity and fundamental uncertainty. Once again it is difficult to disentangle these



different notions. The idea of a monetised economy could also be associated with the principle of effective demand since it is difficult to imagine an independent investment function without a monetised economy. In orthodox state-of-the-art macro models, such as the dynamic general equilibrium approach, there are no nominal magnitudes nor is there any need for money. Some commodity acts as a numraire or ig^it of account. As in neo-Walrasian models, everything is known until the end of time, with some probabilistic degree; in other words there is risk and no fundamental uncertainty. Time in such models is an artificial construct, since all decisions are taken on day zero. The introduction of nominal magnitudes and money adds a friction and reduces welfare - a result that contradicts intuition and that shows how useless these models really are (Rogers, 1989). In post-Keynesian models fundamental uncertainty is assumed from the start, by considering that contracts, debts and assets are denominated in money terms, and by rejecting the possibility of proceeding to the maximisation of inter-temporal utility. Indeed, any model that rejects these state-of-the-art constructs integrates in some manner the concept of fundamental uncertainty.

Post-Keynesians take the notion of time very seriously. They emphasise its irreversibility, as the long run is essentially the result of a series of short-run positions. In their debates with their critics, post-Keynesians have underlined the need to consider and describe the transition from one position to another, recognising that the conditions under which this transition occurs may affect the final position of equilibrium. As Halevi and Kriesler (1991, p. 86) claim, long period analysis in logical time is only relevant when some coherent dynamic adjustment process is specified which can describe the traverse from one equilibrium position to another, without the traverse itself influencing the final equilibrium position, that is, without the equilibrium being path determined. Thus post-Keynesians consider path-dependence and hysteresis phenomena as being typical of their vision of economic phenomena set in historical time.

The importance of time is also related to the notion of non-ergodicity put forth by Davidson (1982-83), meaning that the time and space averages may not coincide, implying that we cannot rely on current or past averages to discover what ought to happen in the future. This concept has certainly attracted some attention with the subprime financial crisis, as it is associated with black swans and fat tails, as well as with large switches in expectations and confidence, leaving little room for the empirical worthiness o f rational expectations and the efficient market hypothesis.

We end this section with a discussion of the elements constituting the fourth set of key characteristics of post-Keynesian economics. These are power relations, open system modelling, pluralism and a concern for social

IS A modem guide to Keynesian macroeconomics and economic policies

issues. Obviously, judging by the number o f supporting authors these elements do not carry as much agreement as the presuppositions listed earlier. The .mportance o f power in explaining economic activity and distributional issues is certainly not a feature unique to post-Kevnesian economics. It figures prominently in Institutional economics and most obviously in Marxist economics. I have already expressed my concerns about the relevance of the open system modelling condition As to preoc cupation for pluralism and social concerns, whatever their merit they dont appear as highly specific to post-Keynesian economics It may have been the case in the past that pluralism - the Babylonian approach as Dow(2005) calls it - could be specifically associated with the post-Keynesian school, because it was one o f the few schools o f thought that was offering a broad tent approach, but it certainly isnt the case any more, as the idea of pluralism has been picked up by methodologists o f all horizons

4. THE VARIOUS STRANDS OF POST-KEYNESIANISM

One of the reasons why it is not so easy to identify the presuppositions that underlie post-Keynesian theory is that the post-Keynesian research programme itself is an aggregation o f apparently heterogeneous schools of thought. Indeed, one of the main critiques regarding post-Keynesian theory is that it lacks coherence. Walters and Young (1997) for instance have claimed that the main representatives of post-Keynesian econom ics show no coherence on definitions, methods, pricing, uncertainty or money. Those who are interested can look at the implicit response of Victoria Chick (1995) and the explicit response o f Arestis et al (1999) Post-Keynesians are usually defensive on the issue of coherence Indeed Davidson (2003-04) himself has argued that the lack o f coherence among those who call themselves post-Keynesians has had a detrimental effect on the prestige and the outside perception of the school of thought In mv opinion, the presumed lack o f coherence is overblown. Ironically it mav have more to do with disagreements over what is wrong with orthodox economics than what a positive contribution ought to include And it has more to do with strong personalities and the belief o f some participants that they hold the truth, and hence that anybody else is wrong Indeed King (2005, p. 244) concludes his interviews o f post-Keynesians by noting that there is substantially more agreement among post-Keynesians than he had originally believed.

The best-known description o f post-Keynesian economists is that of Hamouda and Harcourt (1988), summarised in Table 1.4. They identify

History and methods o f post-Keynesian economics

Table 1.4 The various strands o f Post-Keynesianism

19

Hamouda and Harcourt (1988)

American post-Keynesians

Kaleckians Sraffians

Arestis and Sawyer (1993) Marshallians

KaleckiansSraffiansInstitutionalists

Arestis (1996)

Marshallians

Robinsonians(Sraffians)Institutionalists

Lavoie (here)

Fundamentalists

KaleckiansSaffiansInstitutionalistsKaldorians

a 1 ' v 1? ei 'Can ? ost-Keynesi s and the Sraffians at the two extremes, and the Kaleckians in the middle. The American post-Kevnesians

; Sawvee S|Q o fCi C^ d the MarshaIiia" post-Keynesians (Arestis and20M h? f r S' V " 6)' the Fundame telist post-Keynesians (Lavoie,a u fh o r l? S 001 (Davidson> 1982)- The main concerns of thesea u t o s are the description o f a monetised production economy, the fra-

S r e n t msi r ^ o f the, fi" d -s tio n s tied to liquidity : feferreH^, a" ^ nda e" tal uncertainty. As a result, they have also been

*w T a asF lnanclal Keynesians. An important concern o f several o f' wriUntf ^ ,S t0 amPf y the true and fundam 'al meaning of Keyness

^ * the,lr microeconomi- * a *> invari- V S i D U t a n d A m a d e (1" > nam 6 th 6 m M O-

S r a m , ^ r es,ans- MaTn y o f the better-known Sraffians are Italians S a ^ f reg" ani- Lu,S' Pasinetti. Alessandro Roncaglia, Neri' s S S S - ^ T , ^ Car' Panico ' but ers are not, such as Ian o u t ] ; tWe11, Bertram Schefold and Heinz Kurz. As pointedo f relative ^ 1 Wf very uch concerned with the determinationi n t e M e n ^ r Ch ,Ce$ o f lechni


system, as in input-output analysis. These issues, according to Garegnani (1990, p. 123) constituted the core of Sraffian theory, because he thought that definite answers could be offered. Questions related to output and employment, capacity and capacity utilisation, or to money and interest rates were out of the core, although this did not mean that they were unimportant or not worthy of study.

Several post-Keynesian methodologists argue that Sraffians ought to be dropped from the post-Keynesian school (for instance, Dunn, 2000, p. 350). This in their view would help to bring more coherence to post- Keynesian economics. I think this is an unnecessary move, as Harcourt (2001, p. 275) and myself have previously tried to explain (Lavoie, 1992, 2006a). First, as we saw in the first section, Sraffians are intimately linked with post-Keynesian analysis by tradition and by history. Second, Sraffians are in close agreement with other post-Keynesians on crucial issues such as the causality between investment and saving, the role of effective demand in both the short and the long run, the endogeneity of the money supply and the possibility for the central bank to set short-run interest rates at levels of their choice (Dutt and Amadeo, 1990). Third, Sraffian views are not homogeneous and have evolved through time, so that, as pointed out by Nell (2009, p. 18), the distinctions between the Sraffians and the other strands do not appear to be as sharp as they once did. M odern Sraffians no longer assume that the economy is always running at normal or full capacity. Most of them do not even assume that the economy is running at normal capacity in the long run. Fourth, the Sraffians provide equations that explain production and distribution in an interdependent setting, something that is lacking to some extent in the other strands. Sraffian price theory can be seen as an idealised administered pricing theory, a specific kind of benchmark pricing (Nell, 1998), which abstracts from imperfect information, past disequilibria, non-uniform profit rates or target rates of return, debt structures, and so on. Those who are interested in the study of relative prices can add these complications at will. Finally, Sraffians have made contributions to monetary analysis. The Sraffians were the first to claim that relative prices and real wages are affected by the trend level of the rate of interest, through its proportional impact on the normal profit rate, that is, the target rate of return imbedded in the pricing mark-up.

For all these reasons the Sraffians are still present in my typology (the last column of Table 1.4) and in that of Arestis and Sawyer (1993). They seem to be absent from the three-way typology presented by Arestis (1996), but when he comes to the discussion o f pricing, Arestis reintroduces Leontief, Sraffa and Pasinetti, that is, the Sraffians.

Finally, there is the third strand, as identified by Hamouda and Harcourt (1988), the Kaleckians, made up of authors such as Michal Kalecki, Joan


Robinson, Joseph Steindl, Tom Asimakopulos, Amit Bhaduri, Malcolm Sawyer and Alfred Eichner, to whom we could add writers of this book such as Robert Blecker, Amitava D utt and Eckhard Hein. These authors have been mainly concerned with output and employment, like the American post-Keynesians, but also business cycles, growth theory and pricing issues, in particular the link between mark-ups and growth, and hence income distribution. The potential conflicts regardtfig income distribution are an important object of analysis. Another major concern is that of the realisation of profit, using here Marxist terms. Arestis (1996) calls this group the Robinsonians, adding to them the monetary circuit school that has developed in France and Italy, with Alain Parguez and Augusto Graziani, thus supplementing the Kaleckian strand with a more obvious monetary element.

As can be seen from Table 1.4, other typologies add a fourth strand, ; that of the Institutionalists. Arestis (1996) and Arestis and Sawyer (1993)

give few examples of what authors they have in mind when they identify the Institutionalist post-Keynesians. They only mention Thorstein Veblen, and cite Hodgsons (1988) book, thus probably believing at the time that

v; Institutionalist tradition could reinforce the microeconomic analysis of f post-Keynesians. Since John Kenneth Galbraith was the patron of the p- Journal o f Post Keynesian Economics, I believe that it would be fair to S: present him as a main representative of the Institutionalist strand of post-

Keynesianism, as would his son, James Galbraith (2008). Arestis (1996, ~ P- 114) mentions wage contracts, debt contracts, administered prices,

conventions, routines and habits. Within that strand, one could thus include some works of the French convention school.

There is a substantial amount of work in Behavioural economics or Psychological economics which is closest to the heterodox dissenters; this stream can be associated with the concerns and methods of post

i l Keynesians (Earl, 1986; Fontana and Gerrard, 2004). There is also a sub- K stantial amount of work, linked to industrial organisation, that examines

the evolution of corporations in light of the financialisation process and the development of new information and communication technologies. ^ T h i s work is at the juncture of the Marxist, Institutionalist and Regulation ji school traditions, and post-Keynesians certainly belong to this appraisal. | . Furthermore, the whole administered pricing literature - associated with f?" Means, Andrews and Brunner, Kaplan and Lanzillotti - has been adopted I# by post-Keynesian authors such as Eichner (1976) and Lee (1998). Finally,| the whole movement o f the Neo-chartalist school, as found in Wray (1998),

can be considered as being part of the Institutionalist post-Keynesians, g o since the Neo-chartalists base their policy recommendations on a detailed If analysis of monetary institutions and implementation procedures.


Hamouda and Harcourt (1988) wonder where, within their three-way classification, they should put authors such as Kaldor and Godley. One way out, suggested in the last column of Table 1.4, is to add a fifth strand, that of the Kaldorian post-Keynesians. This strand is mostly concerned with monetary issues, growth, productivity and the constraints arising from open economy considerations, such as the balance of payment constraints or the fundamental identity that links private financial saving, public deficit and the current account balance. Besides Kaldor and Godley, to which one could add John Cornwall (1972), the names of John McCombie and Anthony Thirlwall (1994) stand out, as their work has inspired quite a large following, especially on the empirical side. One could also claim that the work being pursued on path dependence and hysteresis, as well as on endogenous growth, is in this Kaldorian tradition.

It should be made clear that the identification o f these various strands is only indicative. Many eclectic authors go across all or at least two of the categories discussed above, as is the case of authors such as Arestis, Dutt, Harcourt, Kregel, and Nell and his theory of transformational growth. Several younger post-Keynesians feel at ease within all strands, taking the best elements from each.

5. CONTROVERSIES THAT HAVE ROCKED POST- KEYNESIAN ECONOMICS

Economics is well known for its lack of consensus on theoretical and policy issues, and post-Keynesian economics is no different from orthodox economics or Marxist economics in that regard. We have already alluded to at least one controversy among post-Keynesians, that is, the issue of coherence within post-Keynesian economics and the related question o f whether Sraffian economics should be excluded from the definition of post- Keynesian economics. In what follows I identify nine other controversial issues, for a total of ten: post-Keynesian vs. Post Keynesian economics; fundamental uncertainty vs. complexity; Marshallian vs. Kaleckian micro foundations; wage-led vs. profit-led economies; actual vs. normal rates o f capacity utilisation in the long run; debt-led vs. debt-burdened economies; finance vs. managerial capitalism; horizontalism vs. structuralism in m onetary economics; and flexible vs. fixed exchange rates.

Even the spelling of post-Keynesian economics has given rise to controversy. As recalled by King (2002, p. 9), the spelling used in this chapter, with a dash, was used by Nicholas Kaldor and Joan Robinson as early as 1956 and 1960, and it was picked up by Kregel (1973) and Eichner and Kregel (1975), as well as most U.K. writers. Post Keynesian without the


hyphen was proposed by Davidson and Weintraub (1978), when founding their journal, as something that would be broader and more consensual than Cambridge Keynesianism, which at the time was associated with a left view of the world, closest to the Sraffian and Robinsonian strands of the research programme. Ironically, the tables have recently been turned over. Davidson (2003-04) now wants Post Keynesian economics to be restricted to Fundamentalist Keynesianism which, by a strar^g time warp, was already how D utt and Amadeo (1990) defined it.

A permanent sticking point has been the role that fundamental uncertainty should play in economic theory. Many authors feel that an overly large focus on radical uncertainty might lead to nihilistic consequences for theoretical analysis. While the works of G.L.S. Shackle and other proponents of the importance of fundamental uncertainty, psychological expectations, animal spirits and, crucial experiments, as well as creative and transmutable reality, make for a fascinating reading, is this leading us to a trap which is no different from that of post-modernism? If everything, except the shortest period, is uncertain, can we still say anything about the economy and can any empirical analysis be conducted? Furthermore, does fundamental uncertainty imply instability, or does it entail stability, with rules and habits holding up until some important event modifies the conventions that drive the behaviour of economic agents, as argued by Heiner (1983)? Another controversy in this regard is the link between Knightian and neo-Austrian uncertainty on the one hand and post-Keynesian uncertainty on the other. Are these different concepts? Is the former only tied to epistemic uncertainty, due to a lack of knowledge, and is the latter tied to ontological uncertainty, brought about by the fact that the world is evolving in an unpredictable way? Davidson (2003) certainly thinks so. Finally, what is the link between sun-spot equilibria, complex dynamics, hysteresis and path dependence on the one hand, and fundamental uncertainty on

the other? Davidson (1993) sees none, while Barkley Rosser (2006) by contrast sees a tight relationship, going so far as to argue that complex dynamics at work in all facets of the real world are in fact at the origin of the existence of fundamental uncertainty and non-ergodicity, as small

i differences in the initial conditions or the parameter of a system can lead g> rapidly to important changes in its behaviour, making it truly uncertain.

Another debate, associated with the possible lack of coherence within post-Keynesian economics, concerns the choice between Marshallian and

; Kaleckian micro foundations. The debate is tied to the vision of posti l ' Keynesian economics. Authors most closely associated with Davidson g|: see post-Keynesian economics as something more general than main-ill stream or neoclassical economics, and hence judge that it is useful to p ; maintain its standard assumptions, such as diminishing returns and profit


maximisation, also found in Keyness General Theory. Authors closer to the Cambridge streams favour Kaleckian foundations, with imperfect competition, cost-plus pricing and constant or near-constant direct costs. This latter group sees post-Keynesian economics essentially as a more realist alternative to neoclassical economics. But this cleavage should not be exaggerated. Orthodox authors are also inconsistent on this issue, with several dissenters adopting cost-plus pricing, constant marginal costs and decreasing average unit costs in many of their models. Furthermore, some Kaleckian authors have on occasion themselves explored models with Marshallian foundations. In addition, it should be pointed out that both Marshall in his Principles and Keynes in his Treatise on Money have supply prices that incorporate a normal rate of return, as in full- cost pricing. My own preference goes for Kaleckian micro foundations, as I believe they are empirically more prevalent and as I think the main message of post-Keynesian macroeconomics comes across more straightforwardly with these.

On the issue of the Kaleckian approach, a couple of controversies have erupted concerning the Kaleckian growth m odel On the empirical front, many authors have tested whether various countries are under a wage-led or a profit-led regime. This debate was initiated by the publication of the Bhaduri and Marglin (1990) paper, which altered the investment function of the canonical Kaleckian growth model.7 They showed that higher real wages could either promote capacity utilisation and growth rates or slow down these two economic variables. While the theoretical debate has been pretty well cleared up, having identified the parameter values required for one or the other regime, the empirical debate still goes on in full force, but with results that are often inconsistent with each other, depending on the econometric method being used, the specification and the estimation techniques, and the time period. So far, it would seem that the main consensus is that smaller open economies are less likely to be wage led (Hein and Vogel, 2008).

The Kaleckian growth models, as described in the preceding paragraph, are usually not constrained to bring back the actual rate of capacity utilisation to its normal level in the long run. This is seen by some authors - initially Sraffian authors, but also Marxist and even some post-Keynesian economists as well - as a misspecification of the model in the long run. Various mechanisms have been put in place to bring back the actual and the normal rate towards each other (Hein et al., 2010a, 2010b). Do these mechanisms question the main Kaleckian results, most notably the paradox o f thrift and the paradox of costs, which are key features of the Kaleckian growth model? Some dont while others do, thus giving rise in the latter case to the statement that one can hold Keynesian or Kaleckian


views in the short or medium run, while one must hold a Marxist or Harrodian view in the long run. Other authors question whether it is really a foregone conclusion that coherence requires long-run actual rates to equal normal rates.

Another debate that mixes empirical and theoretical elements concerns debt ratios. Are economies debt led or debt burdened? In other words, do debt ratios rise in the upswing or do they rise in the downswing (are they pro-cyclical or counter-cyclical)? The debate was c^fcerned initially with the debt ratios of non-financial firms. It is linked to Minskys (1975) financial fragility hypothesis, which was understood as implying that the debt ratio of non-financial firms was pro-cyclical, the argument being that in the upswing entrepreneurs would become less prudent and would be encouraged by euphoric bankers to take on more debt. Eventually the debt ratios would become unsustainable, perhaps because they would be associated with high interest rates, thus causing the downturn. Two counter-arguments have been presented. The first one is that Steindls (1952) paradox of debt may prevail, with the retained earnings of firms rising faster than their debt during the upswing. The second argument is that of Myron Gordon (1987), who believes instead that when entrepreneurs have gone through a series of successful years, they tend to become more prudent, saving more and borrowing less, to protect their accumulated wealth, thus causing the downturn. But both cases are possible. As pointed out by Wray (2006, p. 283), if the expansion is fuelled mostly through government deficits, the private sector net indebtedness need not increase at all; however, a private-sector-led expansion could result in an increase of net indebtedness of that sector. In any event, the subprime financial crisis has underlined the relevance of the debt ratios of households and the leverage ratios of financial institutions, so these ratios should also be subjected to theoretical and empirical analysis.

Also tied to financial issues is the debate over the relevance of the post- Keynesian firm and of managerial capitalism, as described in Galbraiths (1967) New Industrial State and in many classic post-Keynesian works. The return of finance capitalism, or more precisely, of money manager capitalism, has transformed a rather passive and silent rentier sector into powerful and active shareholders, as pointed out by Stockhammer (2004) and Dallery (2009). What are the implications for the objectives of the firm and those of the managers? Can post-Keynesians still say that the main objective of corporate firms is the maximisation of growth subject to a profit or financial constraint? Stockhammer (2004) and Dallery (2009) argue persuasively that the post-Keynesian analysis of the firm must be modernised to take into account the changes due to the world-wide financialisation process1, managers now worry about the stock market value of


their firms and the 15 per cent rate of return on equity that has become the standard.

This debate extends to macroeconomics: what are the implications of financialisation for macroeconomics? Has it contributed to the slowdown of economies since the 1980s? How can these effects be disentangled from the effects of the high real interest rate regime that characterised most of the world in the 1980s and 1990s? Which of these two phenomena can explain the rise of the profit share in national income? But there is a paradox here: if shareholders keep track so closely of the affairs of their firms, and if managers and CEOs have become so powerless, how is it that the remuneration of the latter has skyrocketed? How can we explain all the financial scandals whereby managers have ripped off so easily their firms and their shareholders, thus proceeding to control frauds? Where does the surplus being appropriated by CEOs come from?

The final two controversies that I will evoke are the question of the exchange rate regime and the structuralist versus horizontalist debate in monetary theory. The latter debate has generated a great deal of attention among post-Keynesians, but since it will be dealt with in Chapter 2 of this book, I will say no more. The debate on the appropriate exchange rate regime has important policy implications. Like orthodox authors, post- Keynesians cant agree on what ought to be the best regime. Some authors favour fixed exchange rates because it provides less uncertainty, so that firms can prepare business plans with a better assessment of their export or import prices (Davidson, 1982). Other authors favour flexible exchange rates because it gives more flexibility to the monetary authorities, helping them to make the short-term interest rate a truly exogenous variable, and thus giving to fiscal authorities the power to pursue expansionary policies when needed (Wray, 2006). All these claims are contingent to the situation of each country, however, since Latino-American post-Keynesians usually point out that flexible exchange rates for countries with a large foreign debt denominated in a foreign currency (those countries suffering from the original sin) provide less, not more, flexibility to the authorities.

6. CONCLUSION: FUTURE AVENUES?

As a way of concluding, we may explore the possible future controversies which may engage the attention of post-Keynesians. First, questions of methodology still attract the attention of post-Keynesians. Right now, there is an on-going debate about the relevance or the need for formal modelling, and about the credence o f econometric work. There is also an on-going debate about the meaning of pluralism, in particular whether


post-Keynesians should attempt to engage more with orthodox economists and in particular with orthodox dissenters, perhaps by transforming post-Keynesian economics into something more amenable to orthodoxy and by erasing references to heterodoxy; or whether they should instead operate a rapprochement with the members of other heterodox schools of thought, thus strengthening heterodox economics at large, but at the risk of weakening sometimes already fragile positions (SllBckhammer and Ramskogler, 2009; Lavoie, 2010).

Another inevitable debate would appear to be around environmental and ecological issues. While post-Keynesianism and ecological economics have similar methodological presuppositions and very similar consumer theories (Holt et al., 2010), environmentalists aim for a slowdown in economic growth or at least in pollution and the use of natural resources whereas post-Keynesians usually support expansionary policies that promote growth and employment (Mearman, 2009b). The only way to close this squared circle, so it seems, is to reorient economic activity towards more productive and less polluting processes and to reduce the working week. Post-Keynesians can contribute to an alternative macroeconomic analysis of ecological objectives, taking into account income distribution and the principle of effective demand.

Finally, there are the all-important political implications o f post- Keynesian theory. One needs to pursue the efforts of Heinrich Bortis (1997, p. 6) in arguing that post-Keynesian theory may be considered the political economy of the intermediate or middle way between liberalism and socialism.

NOTES

I.1 This meant essentially the work of Wynne Godley and his acolytes - or New Cambridge economics.

2. The journal was first to be called the Journal of Keynesian Economics, but its acronym, JOKE, was judged to be inappropriate (Colander, 2001, p. 85).

3. Eventually, in 1993, the Thames series was resurrected as the International Papers in Political Economy, edited by Philip Arestis and Malcom Sawyer, They are now edited in the form of a book series, at Palgrave/Macmillan.

4. AFEE, Association for Evolutionary Economics; ASE, Association of Social Economics.5. See http://www.heterodoxnews.com/ and http://www.paecon.net/PAEReview/. The first

post-Keynesian electronic initiative was the Post-Keynesian Thought discussion list, run by Ric Holt from 1993 to 2004. Various blogs now play this role.

6. It might be worth emphasising that the lack of effective demand might not always be the problem. Unemployment might also be of the Marxian kind, as pointed out by Kalecki

in 1966 (as reported by Feiwel, 1972, p. 19) and also by Joan Robinson in an interview:. . It seems clear to me that unemployment in most developing countries is not due to

a deficiency of effective demand, but rather to a deficiency of equipment. Keynesian remedies can be effective as a solution to a problem of under-utilization of capacity, but

28 A modem guide to Keynesian macroeconomics and economic policies

it is evident that they cannot create a capacity that doesnt already exist. Pizano (2009, p. 96).

7. Kurzs (1990) model makes the very same point. It came out at the same time and was presented in 1987 at the same conference as Bhaduri and Marglins paper. But for some reason, it is often unjustly left out in the literature.

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