Bedtime Reading: Demand in the Long Run | heteconomist.com. There is a strand of economic theory concerned with the operation of Keynes’ principle of effective demand in the long run. In this tradition, a central role is given to demand in analyses of accumulation and growth under capitalist conditions, in contrast with the neoclassical New Keynesian approach which attempts to confine the influence of demand on output and employment to the short run. The latter approach, being reliant on adjustments of demand to supply-determined rates of growth via the price mechanism, has been undermined by the capital debates. A recent paper by Sergio Cesaratto provides a helpful overview of the various positions so far adopted in the debate: Neo-Kaleckian and Sraffian controversies on accumulation theory In a couple of places, Cesaratto alludes to compatibilities between the analysis of demand-led growth and neo-chartalist and circuitist approaches to money.
Long period effective demand and the Sraffian supermultiplier Growth without normal capacity utilization. Good Introduction to the Capital Debates | heteconomist.com. Others, including Tom Hickey, Robert Vienneau and Lord Keynes, have already mentioned this, but Matias Vernengo has provided an educational post on the content and significance of the capital debates. For those who are unfamiliar with the debates or remain uncertain of what was involved, Vernengo’s post is well worth reading. It is both informative and accessible.
I won’t summarize the post here, because it is better to follow the link to Vernengo’s actual post. I will simply highlight some of the key aspects that make the topic a significant one. As Vernengo discusses, the implications of the capital debates for the analysis of market economies are far-reaching. Vernengo also points out the empirical relevance of the results. On the Market Evaluation of Productiveness | heteconomist.com. This is a brief follow-up to a couple of previous posts (here and here) that concern the market evaluation of social productiveness. In particular, it relates to frequent assertions, for example in the debate over the job guarantee, that private markets are better at evaluating social productiveness than alternative (e.g. democratic) mechanisms. One example of what I am referring to occurs in John Carney’s recent critique of the job guarantee proposal: The jobs created under the Job Guarantee are specifically not supposed to compete with the private sector, which means that they supply goods and services for which there is not a market demand.
The total output of the economy might increase, but much of this output is non-productive—that is, it doesn’t actually improve our lives. It is claimed that since there is no market demand, much of the activity would not be socially productive (would not “improve our lives”). If the answer is yes, what is the logic leading to this conclusion? Taking Demand Seriously | heteconomist.com. Taking the role of effective demand seriously can sometimes seem to put you between a rock and a hard place in relation to other economists. Here, I want to consider the significance of demand in general as well as in terms of understanding the current crisis, particularly its connections to profitability. On one side is the neoclassical orthodoxy, with its denial of any impact of demand on output and employment in the long run.
In the lead up to the global financial crisis, these economists were even denying any significance in what is now clearly understood to have been an unsustainable build up of private debt. At the time, this was supposedly the rational decision making of intertemporally optimizing individual agents. I share some agreement with those Marxists who see falling profitability as crucial to explaining the crisis, but disagree with the dismissal of demand, credit and policy factors. In particular, I think demand and profitability are really two sides of the same coin. The capital debates: A brief introduction. Teaching on the capital debates this and last week. So here are some thoughts, based on my class notes and the required readings (see below). The capital debates remain a puzzling chapter in the history of economic ideas. Nearly everyone accepts that the British (as opposed to the Massachusetts) Cambridge won the debate, something Paul Samuelson acknowledged early on. Yet, no one seems to grasp the full implications and relevance of the debate itself.
Typically it is assumed that the capital debates relate simply to problems of aggregation, and that the use of aggregate production functions and aggregative measures of capital are still justifiable, for simplicity’s sake. However, contrary to this viewpoint the capital debates did not rest upon the possibility of building aggregate measures. The capital debates are associated with the very notion of capital. Additionally, substitution leads to the full utilization of resources and their optimal allocation. . (3) pk=(1-wlc)/rkc Figure 1. More on Keynes vs the Neoclassical Synthesis | heteconomist.com. Yesterday (here) I linked to a post by Matias Vernengo on Keynes’ theoretical contribution in light of the capital debates. I thought it might be worthwhile to elaborate on a central aspect of Vernengo’s post, particularly as it concerns the fundamental differences between Keynes’ ideas and the interpretation of neoclassical synthesizers of his work.
Vernengo’s perspective on the significance of Keynes’ theoretical insights and the deep flaws in the marginalist interpretation is one that is probably held by most heterodox economists working in Sraffian and Post Keynesian traditions. I would think MMT economists also tend to share this perspective. Briefly, the perspective is as follows. Keynes argued that unemployment is caused by a deficiency of aggregate demand. The neoclassical followers of Keynes – including the Neoclassical Synthesis, Old Keynesians, New Keynesians, etc. But Keynes clearly rejected the orthodox position on employment and interest. Addendum March 3, 2012.
Lucas in context, Keynes out of context. Krugman decided to try his hand at history of macroeconomic thought in one of his last posts. That's great, since history of thought is essential to understand how we got here. It's also bad, since Krugman is still very much a mainstream author, and misses the point of Keynes' contributions, and the limitations of neoclassical (or more properly, marginalist) approach. He suggests correctly that the New Classical (NC)/Real Business Cycle (RBC) project was a failure, but both the reasons for that and his interpretation of the Keynesian project are misguided. The first proposition in Krugman's reassessment of the recent history of macroeconomics, is that Keynesian models were ad hoc, and assumed wage and price rigidity. The whole of chapter 19 of the General Theory (GT) is about the effects of price and wage flexibility, and how it does not produce full employment. Keynes is actually quite explicit about the negative effects of wage reductions.
Krugman Mentions MMT Again … | heteconomist.com. In “What are Taxes For?” , Paul Krugman chooses to mention MMT again, though only in passing on this occasion. Krugman’s post follows recent consideration of MMT by Brad DeLong, Nick Rowe and Steve Randy Waldman. Much of the disagreement expressed by these economists appears to stem from misunderstandings of monetary operations, but implicit assumptions over long-run employment determination and the nature of interest also seem to contribute to the differences in perspective.
In this post, I want to explore these points a little, using Krugman’s brief remarks as a springboard for the discussion. Operational Aspects of Deficit Spending Krugman’s remarks seem to reflect a simple misunderstanding of monetary operations. Krugman writes: So taxes are, first and foremost, about paying for what the government buys (duh). Krugman seems stuck on the notion that taxes “fund” government expenditure, when it is clear that this is operationally impossible for a sovereign currency issuer. Misinterpreting the Sectoral Balances | heteconomist.com. The government deficit equals the non-government surplus, by definition. Although the relationship is straightforward, it often meets with resistance.
It might be worth reflecting on the orthodox interpretation of the identity and the problems with it. This post is prompted by a comment by Peter D: This point – that the govt. deficit = non-govt. surplus – seems so self-evident once you think about it that it keeps amazing me how on earth anybody could dispute it. Can you identify what exactly prevents people from appreciating this point? Others may have different explanations for the resistance to this interpretation of the identity. Textbook Presentation In introductory textbooks, the student is typically presented with the identity in one or more of the following alternative forms at different points in the presentation: The first version of the identity stresses the components of demand that contribute to GDP. Causation where BD is the budget deficit. Alternatively: Kalecki/Keynes Summary. Interest, Money and Crisis | heteconomist.com.
Throughout the history of economic thought, opposing perspectives on interest and money have created fundamental divides between the various schools. In the one camp, interest is regarded as having a real determination, with monetary policy ultimately at the mercy of the markets. In the other camp, the determination of interest is considered to be monetary, and a politically determined variable. This post is a little broader than normal. It was prompted by a couple of questions that are not really connected, but acted as a catalyst for what follows. I will probably explore individual aspects of the subject matter here in future separate posts. The first question was one I read recently on a discussion forum. I don’t say that all public debt is bad. MMT suggests that the rate of interest has a monetary determination, and is in fact a policy choice. In fact, MMT economists typically argue for a zero interest-rate policy (e.g. see this post at billy blog). The Rate of Interest. Straw Men (And Women) | heteconomist.com.
This post is for all the MMT foot soldiers out there in cyberspace, including myself and most readers (prominent MMT economists who are kind enough to drop in from time to time excepted, of course). Come on, we know who we are. Battling it out in diverse message forums, matching wits with fellow participants who, judging from their arguments, mostly appear to read our posts with their eyes shut and their fingers in their ears to block out the sounds of our linked video presentations. This navel-gazing exercise may seem self-indulgent to the crustier MMT old-timers among us, but, hey, rationalize it, we deserve it!
The post is also for readers who have not yet made up their minds about MMT. Straw Men in Cyberspace On a private message forum I often visit, a regular participant – who is very bright, and a good contributor on many topics – recently posted a criticism of the MMT position on budget deficits that went something like this: Straw Men in Academia MMT claims we can print prosperity. QE is not Inflationary – Just Ineffective | heteconomist.com. In the US, the Fed has just commenced another round of quantitative easing. This is despite the absence of any evidence to suggest that previous implementations of the policy – in Japan, the UK or the US – have had any significant impact on demand, output and employment. At the same time, some critics of quantitative easing claim that the policy will be inflationary.
But this claim also defies both theoretical considerations and the empirical evidence. The policy is not inflationary, just impotent. The Fed’s decision to persist with the policy probably says more about the neo-liberal distaste for discretionary fiscal policy than any confidence that QE2 will be more successful than its predecessor. An earlier discussion of quantitative easing can be found here. Since quantitative easing simply swaps one type of asset for another, it does not alter the net financial assets of the non-government sector in any significant way. (iii) Perceived wealth effects stimulating aggregate demand. Krugman and Galbraith on Deficits | heteconomist.com. In a recent NYT post, “I Would Do Anything for Stimulus But I Wouldn’t Do That (Wonkish)”, Paul Krugman writes: Right now, the real policy debate is whether we need fiscal austerity even with the economy deeply depressed. Obviously, I’m very much opposed — my view is that running deficits now is entirely appropriate.But here’s the thing: there’s a school of thought which says that deficits are never a problem, as long as a country can issue its own currency.
The most prominent advocate of this view is probably Jamie Galbraith, but he’s not alone. In this passage, Krugman misinterprets Modern Monetary Theory (MMT) from the outset. MMT does not say “deficits are never a problem”. Rather, the theory suggests that the appropriate level of deficit expenditure is that amount just sufficient to sustain full-employment output given private-sector net saving intentions. Krugman continues: … I can’t go along with [Galbraith's] view that OK, I don’t think that’s right. Galbraith continues: Taxation, Money, Freedom and Economy | heteconomist.com. MMT implies some interesting connections between money, taxes, social cooperation, freedom and different economic systems.
In particular, it brings to light some of the social possibilities opened up by fiat money. It seems clear that under any social system it will be necessary to impose at least minimal constraints on social activity in some sense until and unless we can evolve to a level where all cooperation is spontaneous and voluntary. Personally, I am on the side of keeping those constraints, in their overall effect on personal freedoms, as minimal as possible. I think economic libertarians are correct to identify tax obligations as one form of social constraint on individual behavior. Taxation serves various roles under capitalism – a measure of business-cycle stabilization, a degree of income redistribution, and an opening up of space for public-sector activity. It is possible to conceive of economic systems without taxation. All this is still very far from socialism.
Thinking in a Macro Way | heteconomist.com. To understand aggregate behavior, it is necessary to start at the aggregate or macro level of analysis rather than the individual or micro level. This is because there are certain relationships that must hold, by definition, at the aggregate level. These relationships are specified in macroeconomic accounting identities. Reasoning at the individual and micro level is also necessary to understand many aspects of the economy, including the aggregate economy, but the micro reasoning must be consistent with the relationships holding at the macro level. In considering the aggregate economy, macro reasoning takes precedence over micro reasoning.
A major strength of modern monetary theory (MMT) is that it starts from relationships that must hold true at the aggregate level, and then ensures that any behavioral assumptions that go beyond what immediately follows from these aggregate relationships (and so are contestable) are fully consistent with the accounting identities. R = (CP + I) / K. Critique of Riedl on Government Spending | heteconomist.com. Saving as a Burden on Future Generations | heteconomist.com. Misplaced Faith in Quantitative Easing | heteconomist.com. Ideas that might not matter: Inefficient technological path dependence. Nobel-nomics | heteconomist.com.