Marc Lavoie_Intro to Heterodox Economics

8/12/2019 Marc Lavoie_Intro to Heterodox Economics

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Essentials of Heterodox

and Post-Keynesian

Economics

Marc Lavoie

University of Ottawa


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The global financial crisis has had an

impact on Students of economics

Some reporters

Trade unions

Central bankers

The IMF


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But little impact on

The European Commission

Most academic economists and their

economics departments


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Where could it go?

Stop the growing hegemony of neoclassical

economics in economics departments"

Stop repressing dissent" Change the curriculum"

Less emphasis on techniues, more emphasis on

history and institutions Introduce more competition in the field of economic

ideas bring in heterodo. schools of thought


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Outline

1" /eterodo. economics versusorthodo. economics

'" *ost-0eynesian economics " %ho1s afraid of neoclassical

economics2


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PARTI

/eterodo. economics versus

orthodo. economics


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Heterodox vs Orthodox economics

HETERODOX ECONOMICS

NON-O3T/O4O5 ECONOMICS

*OST-CLASSICAL ECONOMICS

3A4ICAL *OLITICAL

ECONOM6

3EAL-%O3L4 ECONOMICS

NE% *A3A4I7MECONOMICS

ORTHODOX ECONOMICS

4OMINANT*A3A4I7M

NEOCLASSICALECONOMICS

T/E MAINST3EAM

MA37INALISM

OL4 *A3A4I7MECONOMICS


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Heterodox schools in economics

*ost-0eynesians

Sraffians )Neo-3icardians+ Old Institutionalists

Mar.ists, 3adicals

4evelopment Structuralists )Latin-American school, Furtado,

*rebisch+ French3egulation School, Social Structure of Accumulation )SSA+

Neo-Schumpeterians

Circuitists

Social economics and /umanistic economics Anti-Utilitarism )MAUSS+

Economists of 8 conventions 9

Feminist economics

7reen economics )Ecological Economics+ Old behavioural economics

And no doubt many others )7handi economics, /enry 7eorge,7esell, *olanyi, system dynamics, agent-based, Neo-Austrians)2+"""


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Dissenters in economics

Heterodoxy Orthodoxy

Dissenters Mainstream


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Examples of orthodox dissenters

Milton Friedman

Amartya Sen

7eorge Akerlof

*aul 0rugman

JosephStiglit:

Oliver %illiamson

3onald Coase

%illiam ;ickrey 2

/erbert Simon 2

0eynes 2


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What do all these heterodox

sch

oolsh

ave in common? 4ifferences between schools of thought and their

relative ranking have a lot to do withthe sociology of

the profession" Some of the discrepancies are due to speciali:ation

in certain fields )cf" T" Lawson+"

Still, in my opinion there are broad features thatcharacteri:e heterodo. and orthodo. schools"

These are called thepresuppositions of research

programmes by ph

ilosoph

ers of science th

ey arethings that cannot be uestioned


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*aradigm

Presupposition Heterodox schools Orthodox schools

Epistemology/Ontology Realism Instrumentalism

Method Holism, organicism Individualism, atomicism

Rationality Reasonable rationality Hyper rationality

Optimizing agent

Economic core Production, growth,

income effects

Exchange, scarcity,

substitution effect

Political core Regulated, tamed,marets !nfettered maretoptimism

Presuppositions of the heterodox

programme vs those of the mainstream


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Instrumentalism vs realism

Friedman1s as if doctrine

8 7ood models have to necessarily be artificial, abstract,

patently unreal 9 )Lucas, 1(+

8 It is better to be precisely wrong rather than roughly right 9

E." The use of the 7aussian copula function to price C4O)collateri:ed debt obligations+ was based on an inde. of C4S

)credit default swaps+ market prices instead of looking at true

default rates"


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Rationality

Orthodo. macroeconomists came to conflate being

rationalwiththinking like an orthodo. economist"

%hat this implied was that agents knew the one andonly true modelof the economy )whichconveniently

was stipulated as identical withneoclassical

microeconomics+#" )*hilip Mirowski, '!11+

A systematic deviation from an insane# standard

should not automatically be called a ?udgmental error1

)7erd 7igeren:er, '!!


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Scarcity versus production

Economics is the study of scarcity )3obbins, 1('+

8 Neoclassical economics is the study of an upward-

sloping supply curve witha downward-slopingdemand curve 9

;s

8 Economics is the study of the process by whichsociety brings its available resources into production,

and the distribution of that production among its

members" 9 )Jo

hn %eeks, '!

1'+


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Distrust in unfettered markets

8 On the one side are those who believe that

the e.isting economic system is, in the long

run, a self-ad?usting system, th

ough

with

creaks and groans and ?erks and interrupted

by time lags, outside interference and

mistakes @ " On the other side of the gulf arethose that re?ect the idea that the e.isting

economic system is, in any significant sense,

self-ad?usting 9$ 0eynes, C%, .iii, p"


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Holism: Some crisis-related macro paradoxes

*arado. of thrift )0eynes 1(B+ /igher saving rates lead to reduced

output,*arado. of costs )0alecki 1(B(,

3owthorn 1(+ Stability is destabili:ing

*arado. of debt )I" Fisher 1(,

Steindl 1(>'+

Efforts to de-leverage might lead to

higher leverage ratios

*arado. of liuidity )4ow 1(


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Edard !ullbrook"#$%&': ne paradigm

Start from realdata

not apriorism

Real-world

rationality

Ho

lism

No market clearing

4iseuilibria

*luralism

Math-formalism

upside-down

3adical uncertainty

Economy is asubset of biosphere

Facts and values

are inseparable


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Summing up this part(

/eterodo. economics is distinct from orthodo.

economics"

The various heterodo. schools of thought have a lotin common, especially on the methodology side"

4ifferent schools of thought often focus on different

fields, so that their similarities are not alwaysobvious"

&ut ?ust as there are battles between New Classical

andN

ew 0eynesian economics, th

ere aredisagreements between various heterodo. schools"


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Part II

*ost-0eynesian economics


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Phases in the creation of PKE

1(!s-1(>!s The Beginnings

$ 0eynes 1(B 3obinson 1(>B

1(B!s-early 1(=!s The Capitalcontroversies, theresponse to monetarism

$ Sraffa, *asinetti, 7aregnani $ 0aldor, 4avidson

Mid 1(=!s-1(

$ 0regel-Eichner, syntheses, institutionali:ation

1((!s The Age of Uncertainty

$ Methodology

'!!!s The Age of Policy


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Specific post Keynesian


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Specific post-Keynesian

presuppostions

The relevance of the principle of effective demand)demand-led economies+

$ &oth in the short and the long run

$ The supply ad?usts to demand )inversed Say1s law+, butsee 0alecki and 3obinson on capacity constraints

$ The autonomy of investment from inter-temporal decisionsof households )investment causes saving+

The importance and irreversibility of time$ /istorical time

$ 4ynamics, the traverse

$ The long run is a conseuence of a series of short runs,

there is no independent long run trend$ *ath dependence, multiple euilibria

$ Tracking financial stocks through time

A ili t K i


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Auxiliary post-Keynesian

features

Fundamental or radical uncertainty

A monetaryproduction economy Alternative microeconomics )little reliance on

substitution effects+

4iversity of methods and theories Institutions make a difference )Monetary and fiscal

policies do have an impact on real uantities+


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qqfc qth

AVC" D!C" mc

#!C

mc

AVC

The shape of cost curves

Th i PK t d ) t l


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The various PK strands: )-ay typology

"undamentalist or "inancial Kenesians$

$ Money, finance, liuidity preference, uncertainty, methodology$ 4avidson, Minsky, 0regel, Chick, 4ow, Fontana

Kalec%ians$$ *ricing, growth, cycles, employment, income distribution

$ Sawyer, &haduri, 4utt, &lecker, Fa::ari Sra&&ians$

$ 3elative prices, technical choice, input-output models, capital theory

$ 7aregnani, 0ur:, *asinetti, Steedman

Institutionalists$$ Institutions )firms, banks+, pricing, behavioural economics

$ Fred Lee, *eter Earl, 7albraith'., MMT)%ray+

Kaldorians$$ 7rowth, money, international trade, productivity growth

$ 7odley, Thirlwall, McCombie, *alley

$ Some authors go across the strands Arestis, Nell@"


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Part III

%ho1s afraid of neoclassical

economics or why do neoclassical

theories always seem to be

supported by empirical evidence2


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Theoretical constructs re*ected by PK

economists

NAI3U or the natural rate of unemployment

The loanable funds theory and the natural rate of interest

Crowding-out effects )e.cept for possible psychological effects+

Say1s law

Inflation is a monetary phenomenon

Aggregate employment determined in the labour market

/igher saving leads to higher investment

The government debt constraint is similar to that of households

The efficient market hypothesis, in its various incarnations

That unemployment is only due to sticky prices &ank reserves cause bank loans and deposits

Unit cost curves have a U-shape

A th th ti l t t * t d


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Another theoretical construct re*ected

by PK economists

The !ell-beha'ed neoclassical (roduction &unction

For instance the Cobb-4ouglas production function

This was at the heart of the Cambridge capitalcontroversies of the 1(B!s and 1(=!s

It was shown that standard results of neoclassical

theory obtained with such aggregate productionfunctions did not hold in a model with two or more

sectors )say, two sectors producing investment and

consumption goods respectively+

Cambridge +K vs Cambridge ,assachusetts


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L/$ L/$

L/$

w/pw/p

w/p

LD

%a& %b&

%c&

LS LD

LD

Cambridge +K vs Cambridge ,assachusetts


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The counter of post-Keynesians

The coefficents of the regressions are supposed toyield the output elasticies of labour and capital, which

depend on technology"

In reality, because macro data must be deflated, whatis truly being computed by these regressions are the

wage and profit shares in national income"

This has been demonstrated by John McCombie)'!!1+ )see the recent book of Jesus Felipe and John

McCombie )Not Even Wrong, '!1+

This puts in *eopardy all of


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This puts in *eopardy all of

neoclassical economics because

8 The neoclassical production function is the cornerstone of

neoclassical theory and is used in virtually all applied analyses 9

)*rescott 1((


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!urther issue: publication bias

4ata fishing, data mining, data massaging

Now famous e.ample the 3einhart and 3ogoff

)'!1!+AERstudy on the negative impact of publicdebt ratios above (!D

/erndon, Ashand *ollin )'!1+ found there were

coding mistakes, omitted entries, unconventionalweighting"

8 3eviewers and editors of academic ?ournals may

be predisposed to accept papers consistent withthe

conventional view 9 )Tom Stanley, '!!>+

,eta-regression analysis: regression


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on regression results

, t i l i


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,eta-regression analysis

Shows that more than half of the fields of researchsuffer from se'ere publication bias"

Falsifies the claim that larger government deficits

lead to reduced household spending )3icardoeuivalence theorem+

Falsifies the claim that there e.ists a natural rate of

unemployment towards whichthe economyconverges" Also falsifies the claim that e.pected

inflation leads to a one-on-one increase in the rate of

inflation" Thus, the NAI3U, whichis at the heart of

current monetary policy, is falsified"

The role of post-Keynesian economists


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p y

"and young economists in general'

The crisis has clearly demonstrated, if sucha

demonstration was needed, that there is something

wrong withmainstream economics )Financial Times

The credit crunchhas destroyed faithin the freemarket ideology#+"

In view of these failures, it is our social duty to keep

developing an alternative view of the economicsystem"

It is our duty to sustain and clarify the heterodo.

traditions th

at uestion th

e efficiency of unfetteredmarkets"

Marc Lavoie_Intro to Heterodox Economics

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