Post-Keynesian Economic Thought Research Paper

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1. Introduction

For Joan Robinson (1978; CEP, in reprinted Vol. 5, 1979, p. 210), ‘the expression post-Keynesian … [applied] to an economic theory or method of analysis which takes account of the difference between the future and the past’: a helpful point from which to start but it must be remembered that the approaches to political economy reflecting Post-Keynesian thought are there for historical reasons and because of logical associations. Post-Keynesianism is a broad church. Overlaps at each end of a long spectrum of views are marginal, reflecting little more than hostility towards mainstream neoclassical economics and methodology, and conventional forms of Keynesian economics as opposed to the economics of Keynes. Some PostKeynesians attempt to synthesize the principal strands. Others regard this as misguided. Post-Keynesianism should use a situation—and issue-specific method, a ‘horses for courses’ approach, itself an all-embracing structure at the methodological level.

In this essay historical origins are discussed first; it then deals with approaches to fundamentals issues political economists have tackled since the Physiocrats and Adam Smith theories of value, distribution, pricesetting, accumulation, growth and the cycle, and the role of money and financial intermediaries, especially whether money is endogenous or exogenous. PostKeynesian thought belongs to the tradition that the raison d’etre of economics is its bearing on policy. Stress is put on the role of institutions in determining economic and political processes, the political philosophies of Post-Keynesians and the policies following from their theories.

All these issues, the methodologies implied in them, the particular ‘vision’ of the economy associated with each strand, are intertwined. This research paper concentrates on origins, pioneers, and issues. For a full cast list see, for example, Eichner and Kregel (1975), Hamouda and Harcourt 1988; reprinted in Sardoni 1992, Arestis 1992, Lavoie 1992.

2. Classical Roots

Keynes’s new theory reached back over neoclassical economics to join up with the pre-occupations and approaches of our classical forebears. Much that was integral to Keynes’s system, especially its Marshallian offshoots, was jettisoned, at least by Post-Keynesians sympathetic to the viewpoints of the classical economists and Marx. This rules out two prominent American Post-Keynesians, Sidney Weintraub and Paul Davidson, whose structures are amalgams of Marshall and Keynes and who are hostile to Marx, Michal Kalecki, and Piero Sraffa.

An important aspect of classical economics for Post-Keynesian thought is the organizing concept of the surplus—its creation, extraction, distribution, and use. It is the core of their system and its modern counterpart, dovetailing logically with a view of economic processes as dynamic, evolving, progressing organic systems, not the more static allocative process characterizing neoclassical economics until neoclassical growth theory emerged in the 1950s. Linked to the concept is the notion of a class society, sometimes people, sometimes income, sometimes overlapping. Classes perform different functions. Each is treated as homogenous, with no need to start from the isolated individual economic agent of modern analysis.

Associated with the surplus concept is that of the long-period position, containing the centers of gravitation of the system (Smith’s natural prices, Marx’s prices of production, Marshall’s long-period normal equilibrium prices (and quantities)). With them comes the view that general theory is analysis of interrelationships of dominant, persistent forces in society. Modern counterparts are Sraffa’s work on value and distribution and Pierangelo Garegnani’s (and others’) long-period interpretation of Keynes.

3. The Marshallian-Keynesian Roots

Turning to the Marshall-Keynes connection, Marshall’s system, as Keynes understood it and within which he perceived himself as operating up to A Treatise on Money (1930; C.W., Vols. V, VI, 1971) is noted. Basic ingredients were emphasis on the long period, the real and money dichotomy, the logically prior need for a Say’s Law long-period equilibrium position for the Quantity Theory of Money to explain the general price level. Keynes liberated himself from this to write the theory of a monetary production economy—The General Theory (1936; C.W., Vol VII, 1973).

Effective demand occurs at the intersection of the aggregate demand and supply functions, usually implying involuntary unemployment. The money rate of interest (which clears the money, not the saving and investment market) rules the roost. Uncertainty is a permanent environment for important economic decisions, especially those concerning investment and holding financial assets for speculative and other purposes. The consumption function is stable, the investment function, volatile; they are connected by the Kahn-Meade multiplier. Finally (an aberration for most Post-Keynesians), the general price level is explained by short-period Marshallian analysis at the level of economy as a whole. These are the jumping-off points for American Post-Keynesians especially.

4. Keynes’s Theory Of Accumulation

Accumulation theories under our rubric start from, or incorporate, the ingredients of Keynes’s theory. The details are usually stringently criticized. The recipes emerging mix the same ingredients in more acceptable ways. Within its own framework Keynes’s theory was unacceptable. Keynes confused accumulation’s stock and flow aspects by naming his principal concept the marginal efficiency of capital (MEC). Capital is a stock; he was mainly concerned with investment, a flow, and so the marginal efficiency of investment (MEI ).

Keynes’s arguments why higher rates of accumulation are associated with lower MEI values, with short-period flow equilibrium achieved when MEI = i, (i = the rate of interest), were far-fetched or non- clinching. Keynes assumed rising marginal costs and (usually) marginal-cost pricing. At higher values of accumulation in a given situation, there are higher supply prices and lower MEI values. Individual free competitors have, in effect, rational expectations; it is as if they use the eventual equilibrium, not the market price of capital goods in their calculations. Otherwise, their combined actions could not bring about that overall rate of production of capital goods which establishes the appropriate supply price and MEI value equal to i.

Second, Keynes argues that because we do not know the future, we project the present into the future unless there are good reasons for not doing so. Higher investment levels are associated with higher sales, prices, profits, output, and employment. Keynes’s investment analysis assumes that expected longer-period demand curves for the products concerned remain stable while future short-period supply curves associated with possible levels of investment move to the right, implying lower expected prices, quasi-rents and MEI values for investment projects now. If Keynes were true to himself, expected demand curves would move too. Lower values of prices, etc. would not necessarily follow. Keynes used a static analysis to analyze a dynamic process, a criticism first made by Kalecki reviewing in Polish The General Theory (1936, C.W., Vol. 1, 1990, pp. 223–32), subsequently by Joan Robinson 1951–1980 and Tom Asimakopulos 1971.

They reacted by setting out the two-sided relation- ship between accumulation and profitability—actual investment is a major determinant of current profits; current profits, a major determinant of expected profits, which determine planned accumulation in situations of given financial conditions and long-term expectations. This is the basis of Kalecki’s theory of distribution, accumulation, growth and the cycle, and Joan Robinson’s famous banana diagram, Robinson (1962, p. 48).

Pasinetti (1997) remains true to Keynes, pointing out that the MEI soon became identified with the marginal product of capital, that investment was treated as a ‘deepening’ process responding to different i values. Pasinetti argues Keynes made no such claim— he argued that in a given situation, lower i values make more of the existing investment projects seem profitable regardless of capital-intensity orderings. David-son (1972), too, accepted Keynes’s analysis, using Keynes’s alternative presentation to describe investment projects by their NPVs at ruling i (s). He used Keynes’s spot, forward, and futures analysis to go from investment possibilities—prices exceed supply prices—to determine equilibrium flows per period.

5. Post-Keynesian Theories Of Value, Distributions, And Price Setting

Post-Keynesian theories of value, distribution, and price-setting by, usually, an oligopolistic price-leader firm are now examined. Both sets of theories arise from dissatisfaction with supply and demand theories. The theories criticized and proposed as alternatives are macroeconomic. They arose from the empirical observation cum theoretical deduction of classical political economy that, with free competition, there is a tendency to a uniform rate of profit in all activities. Two questions arose: what is the origin?, and what determines the size of the system-wide rate of profits (Sraffa’s usage) (Sraffa 1960) to which individual rates tend to be equal? The most explicit, refined answers were Marx’s. He emphasized that the ultimate source of value is the difficulty of reproduction in a system of production of commodities by means of commodities (as opposed to utility and scarcity in the alternative tradition). Reconciliation is needed between the embodied labor values of commodities in the sphere of production and prices of production in the sphere of distribution and exchange. The latter contain the overall rate of profits and are the centers of gravitation of the system.

The other major alternatives to the neoclassical marginal productivity explanation of returns to capital and labor and shares of wages and profits are those Kaldor (1955–56) called Keynesian. He was not the first to set forth such a theory. Kalecki (1933, reprinted in 1971, pp. 78–9) had long before: ‘capitalists may decide to … invest more in a given period than in the preceding one, but they cannot decide to earn more … therefore, their investment … decisions … determine profits, … not vice versa.’ Kaldor located their origins in the widow’s cruse story of A Treatise on Money (1930; C.W., Vol. V, 1971, p. 125) Joan Robinson (1977; C.E.P., Vol. V, 1979, pp. 184–96) provided a lucid account of Kalecki’s theory. Consider the case of no consumption by rentiers, no saving by wage-earners and no government or overseas sectors. Profits (II ) exactly equal investment (I ), causation runs I II. Kaldor’s version is the best known. Common features are different saving behavior at the margin as between wages and profits (and or wageearners and profit-receivers) and the Keynesian Kaleckian proposition that investment leads and saving responds. Kaldor’s theory is, paradoxically, longperiod and relates to a fully employed economy. Kaldor argued, never coherently, that a growing economy must be fully employed in the long-period sense. Planned saving and investment (and their share of full employment income) are equalized when the income distribution is such that the matching amount of saving is forthcoming.

The process bringing equality depends upon Kaldor’s (claimed) empirical observations that while short-term money prices and money-wages are sticky, so that changes in income equalize saving with investment, longer-term prices are more flexible than wages. These differential changes continue until equality is secured, implying that modern wageearners have real wage levels so far above the classical Marxian subsistence levels that they passively accept what remains after profit-receivers have first bite of the cherry: the opposite of the older scenarios in which wages had to be met and the surplus available for profits (and thus accumulation) is what is left.

The other theories under this heading are short period and not constrained to be at full employment. Saving is equalized with investment by changes in activity and income distribution as profit margins change relative to wage costs, a rest state usually exhibiting involuntary unemployment. (In the most developed models there are roles for the government and overseas sectors.)

The most rigorous presentation of modern classical theory is Sraffa’s Production of Commodities by Means of Commodities (1960). Sraffa’s model is formally similar to Leontief ’s input-output model; the conceptual interpretation is different. With production with a surplus and explicit wage rate (w) and rate of profits (r), Sraffa shows we must know from outside the value of one of the distributive variables. (The classical economists and Marx chose w, Sraffa chose r.) The prices of production and the value of the other distributive variable are simultaneously determined. The prices of production are centers of gravitation in the particular circumstances of the time, around which market prices fluctuate—or perhaps on which they converge. (Modern work suggests they do not necessarily do either.)

Sraffa starts with a circulating, single-use commodity model, then takes us through non-renewable and/or addable to resources (land and rent) and joint production (to analyze durable capital goods, not wool and mutton). He ends with the choice of techniques in the investment decision, showing the possibility of reswitching, destroying the conceptual foundation of a well-behaved demand curve for ‘capital’ in the alternative tradition.

6. The Size Of The Mark-Up

Alfred Eichner’s version (1976) is the most widely known variant of the theory of mark-up size (apart from Kalecki’s ‘degree of monopoly’ theory). Eichner related its size to the investment plans and financial requirements of oligopolistic firms. As his investment function is flawed, we present here as representative Adrian Wood’s (1975) long-period steady-state model of an oligopolistic firm, steady-state because expectations of the values of relevant variables are realized. It is a partial analysis—with a given level of aggregate demand, the firm strives for its optimum share of demand for the industry’s products at the expense of other firms in the industry.

The firm wants its sales revenue to grow as fast as possible, subject to two constraints formalized as an opportunity and a finance frontier. The former reflects that there is eventually a trade-off between profit margin size on turnover and sales revenue growth. Increasing growth requires the margin to be squeezed by a price cut, a rise in sales costs, or both. Assuming one best-practice technique, and given external financial conditions, each growth rate of sales requires a particular margin to finance the capacity to make it possible. The two frontiers’ intersection defines the margin associated with highest growth rate. Introducing choice of techniques defines a family of interacting frontiers. Because opportunity frontiers move out at a decreasing rate—greater investment per unit of sales lowers costs at a decreasing rate—while finance frontiers fan out proportionately—the margins, growth rates locus forms a concave curve containing a maximum margin, growth rate combination.

Wood’s analysis is in Golden Age logical time— expectations realised, no incompatibilities present. Harcourt and Kenyon (1976, reprinted in Sardoni 1992, pp. 48–66) set the problem in historical time— disappointed expectations determine what happens next—using Salter’s vintage analysis. The logical, historical time distinction is due to Joan Robinson (1962, pp. 23–9). Setting the price which finances the accumulation program simultaneously determines the accumulation needed to satisfy expected future sales and still profitable existing capacity (in the sense of covering variable costs) able to contribute to future sales. Frederic Lee (1998) tells the Post-Keynesian price theory story from the earliest times to the present.

7. Post-Keynesian Accumulation: Moses And The Profits

Post-Keynesian theories of accumulation were stimulated by Harrod’s immediate pre and post-second world war contributions towards a dynamic economics 1939; 1948. Harrod in effect rediscovered the systemic instabilities of capitalism Marx brought out in his reproduction schemas analysis. Marx asked: what conditions must be satisfied, period by period, in order that aggregate demand and supply, and their compositions, match? This threw up the impossibility of these being achieved by capitalists doing their own things with regard to production, employment, and accumulation.

Harrod obtained the same result by bringing out the long-period destabilizig effects of a momentary gap between planned saving and investment when short period stabilizing effects are abstracted from by assuming the immediate achievement of investment planned for each short period. The growth rate of income allowing planned saving to equal investment might be such that if business people had known it, they would not have planned those investment levels. The saving and investment functions are so related that excess demand (supply) situations are to the right (left) of the equilibrium position; the system gives the wrong signals as to what to do next. Unless the system is growing at the warranted rate (gw) (the growth rate allowing expectations and plans to be realized), it moves away from it—all regardless of whether gw coincided with the natural rate of growth (gn), the growth rate implied by the economy’s supply-side characteristics.

Solow and Swan interpreted Harrod as assuming a fixed capital-output ratio, and wondered whether this was responsible for his disturbing results. As pioneering Keynesians, they assumed an all-wise government removed effective demand puzzles. They asked whether in a long-period sense, Marshall’s ‘dynamical principle of substitution seen ever at work’ allowed a competitive price mechanism to give appropriate price signals, causing the production methods chosen by accumulators to lead gw towards gn. The answer is ‘yes’ in the simplest one, all-purpose commodity models. These results attracted the Cambridge, UK growth theorists’ attention. Already suspicious of smooth continuous substitution possibilities, they wished to bring in the ‘book of blue prints’ approach (long ‘at home’ at MIT and elsewhere within a different context). The Cambridge UK theorists were loathe to leave out aggregate and effective demand. Their writings mostly remained within the confines of steady-state growth models, learning to walk before running, except for Kaldor who used his distribution mechanism to equalize gw with gn.

Kalecki, Josef Steindl, and Richard Goodwin followed a different path, one eventually congenial to Kaldor and Joan Robinson. Kalecki initially developed trendless cycles; in his last paper (1968, reprinted in Kalecki 1971, pp. 165–83) on these themes, trend and cycle were indissolubly mixed: ‘the long-run trend [is] but a slowly changing component of a chain of short-period situations … [not an] independent entity’ [Kalecki 1968, reprinted in 1971, p. 165].

This view was developed independently by Goodwin, reaching maturity in ‘A Growth Cycle,’ Goodwin (1967). He used the Volterra prey-predator model; the analogy of ‘the symbiosis of two populations—partly complementary, partly hostile—is helpful in … understanding … the dynamical contradictions of capitalism, especially when stated in a … Marxian form’ (Goodwin 1967, reprinted in 1982, p. 167). He analyzed the wages, profits fight, and feedbacks, spawning an expanding literature.

Goodwin integrated effective demand and production interdependence in Goodwin and Punzo (1987). This impressive eclectic book reflects influences from Marx, Schumpeter, Keynes, von Neumann, Joan Robinson, Sraffa, and Kalecki, the developments of catastrophe theory, the concept of ‘bifurcation,’ and the Volterra prey-predator biological analogy. Goodwin concentrated on the nature of evolutionary structures experiencing from time to time large jumps and breaks, his key to the cyclical development of economies characterized by production interdependencies.

Joan Robinson (1962) synthesized these ideas in her banana diagram. From Kalecki she derived a relationship between actual accumulation and achieved profitability; from Keynes she derived the ‘animal spirits’ function relating desired accumulation to expected profitability, itself a function of achieved profitability, in a situation of given financial conditions and long-term expectations. With plausible conjectures about the shapes and positions of the two curves, iteration takes the economy to a stable intersection point where the expected and desired are achieved, her version of Harrod’s gw. It is not a solution of Harrod’s (or Domar’s) problem; there is no reason why gw coincides with gn. Nor are there any mechanisms to take it to gn. Even if the economy attains gw, nothing ensures that it will not be driven away in the future—neither relationship can be expected to remain stable.

Discussing The General Theory twenty five years on, Joan Robinson signaled the change of method lying behind her analysis in 1956 and 1962.

‘The short period is here and now, with concrete stocks of the means of production in existence. Incompatibilities in the situation … determine what happens next. Long-period equilibrium is not at some date in the future: it is an imaginary state of affairs in which there are no incompatibilities in the existing situation.’ Joan Robinson (1962, reprinted in C.E.P., Vol. 3, 1965, p. 101).

These developments constitute an attack on the procedure of setting up theoretical issues as searches for existence and uniqueness of equilibria, themselves determined by factors independent of those responsible for stability, local, and global. Similarly, the applied procedure of separating trend from cycle with independent factors responsible for each is also discarded.

8. Post-Keynesian Method

There are two views on method within historically defined Post-Keynesian thought. Increasingly, commentators put neo-Ricardians in a class of their own; The author does not agree. Sraffa’s critique of neoclassical economics and positive contributions are integral parts of the historical and logical developments, especially when his underlying Marxism is recognized. The neo-Ricardian stance (on method) is identified as common to all strands of political economy until the 1920s when neoclassical economists, including Hayek, sensed the incoherence of the concept of the marginal product of capital and its relationship to the long-period method. They reacted by changing the questions and method to the temporary equilibrium analysis of, for example, J.R. Hicks’s Value and Capital. Neo-Ricardians argue that general theory can only be written about the characteristics of long-period positions reflecting the ultimate outcomes of relationships associated with persistent forces. The economist’s role is to identify these, making rigorously explicit their interrelationships. This, they argue, was common to Smith, Marx, and also Marshall who fitted the ‘new’ supply and demand theories into the old method, making long-period equilibrium prices and quantities the heart of the Principles. Therefore, Keynes’s theory must be longperiod to be a true revolution Garegnani, Eatwell, Milgate, Rogers, and Krishna Bharadwaj refer to passages in The General Theory supporting this. Shortperiod theory has no role in its own right, as opposed to situation-specific analysis at different levels of abstraction.

For Kalecki, Kaldor, and Joan Robinson and their followers, and Paul Davidson and his (the theories differ considerably), the long-period method is a nonstarter for descriptive analysis. (For doctrinal debates even Joan Robinson granted it a role. If conjectures or concepts are shown to be incoherent under ideal conditions, this is a legitimate critique of approaches, conceptions, intuitions, and theories.) For descriptive analysis, we must start from a given short period with inherited historical circumstances and accompanying expectations. Long-term expectations and factors are relevant for some current decisions, e.g. investment, pricing; short-term expectations and factors are relevant for others, e.g. production, employment. The story unfolds from one short period to another. (We have simplified: some current activity results from past decisions; some current decisions are relevant for future activity. This led Keynes to abandon period analysis, despairing of finding a determinate time unit into which all relevant interrelationships could be fitted.) There is an element of convergence in the discipline recently because this philosophy underlies work on path-dependence even when the theory is neoclassical.

These new developments link back to old approaches to method. Keynes, following Marshall, argued that which variables were regarded as endogenous (determined) and which were exogenous (determining) were arbitrary on any absolute criteria. The crucial decider was the issue in hand.

‘The object of our analysis is, not to provide a machine, or method of blind manipulation, [furnishing] an infallible answer, but to provide … an organized and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we … go back on ourselves and allow … for the probable interactions of the factors amongst themselves. … the nature of economic thinking.’ Keynes (1936; as in C.W., Vol VI, 1973, p. 297).

Marshall hoped we would get definite, if partial, results and, if we went right round the economy, would be able to bring all results together in a full, overall picture. He forgot that the procedure was inconsistent with his deeper vision that economic processes were akin to systemic interrelated biological processes. (Jan Kregel argues that the problem is intractable.)

Sheila Dow (1991) stresses the unifying methodological aspect of Post-Keynesian thought, justifying diverse methods. She recalls to mind Keynes on method and theorizing: there is a continuum of languages which runs from poetry and intuition through lawyer-akin arguments to mathematics and formal logic. Each has a role depending upon the issues, or aspects of issues, discussed. Keynes’s emphasis was championed by George Shackle, his favourite example was Keynes’s use of ‘sentiment.’ It could not be defined mathematically, but it gave insights, conjured up atmosphere, invoked the environment of situations analyzed. Kregel (1976) identified in The General Theory three models of economic reality of differing degrees of complexity, the most complex being that of shifting equilibrium. The methods were common to Keynes and Post-Keynesians when modeling decision-making in uncertain environments.

Post-Keynesians following Goodwin, Kalecki, and Joan Robinson eschew the Marshallian (or even Keynesian) method; others combine a similar ‘vision’ of society with explicit use of the Marshallian Keynesian method or, even earlier, the classical economists’ implicit method. Outstanding examples include Pasinetti whose many years work on a multisectoral growth model came to fruition in 1981 (with a simple exposition in 1993). Pasinetti integrates Keynes’s macroeconomic aggregates with the production interdependence of the classicals, Marx and Sraffa. He sets out the consistency conditions required to maintain full employment growth in a multi-sector model in which the demands for commodities over time follow their respective Engels curves, technical progress occurs and, in later stages of the analysis, the economy is open, trading with and borrowing from or lending to, the rest of the world. The best-known exposition of his insights is Pasinetti (1962); he obtained the ‘remarkable result,’ r = g/sc. It has proved extremely robust as complications have been added—international trade, government, financial intermediaries, endogenously determined saving ratios.

Another major contribution is Marglin’s contribution to the conflict inflation literature (1984). (Rowthorn (1977) derived the same results.) Marglin has a Keynesian-Marxian ‘vision’ but is Marshallian in method. His aim is to establish long-period ‘equilibrium’ relationships—short-period stations approach long-period crosses which stay ‘put’ until and after they are reached. His principal result is that sustained rates of inflation allow disappointed aspirations of wage-earners and capitalists to be shared in uneasy but sustainable truces.

Post-Keynesian thought starts from real world observations, for example, Kaldor’s famous ‘stylized facts’: broad empirical generalizations holding, in a rough and ready way, for long runs of historical time, requiring situation-specific theories to explain them. Kaldor pioneered the theory of cumulative causation, a deep idea learnt from Allyn Young (and Gunnar Myrdal) Young alerted Kaldor to the pervasive existence of dynamic increasing returns in economic life. Kaldor exploited these illuminations, and interregional relationships, to analyze specific periods of economic history.

A wolf pack analogy illustrates the contrast between mainstream axiomatic, equilibrium theory and Post-Keynesian cumulative causation theory. The former thinks of a wolf pack running along. If some wolves stray, powerful forces return them to the pack. The latter identifies powerful forces making those leaving the pack get further ahead or fall further behind, at least for long periods of time—hence the rejection of the equilibrium concept in descriptive analysis.

9. Endogenous Money

Keynes, before and after The General Theory, was an endogenous money person, arguing that the demand for money, especially for credit, helped determine the interest rate and the supply of money. Was his stance in The General Theory, where he is interpreted as having an exogenous money supply with the interest rate, the price allowing it to be voluntarily held, an aberration? The answer (given most recently by Sheila Dow (1997) is that the money supply is given, not exogenous. By 1937 he reverted to type when discussing the finance motive for holding money (read, demanding credit)—he had banks creating credit in response to demands for finance for investment projects, a base from which start Post-Keynesian debates on money and credit demand and supply.

Within these discussions, there are claims that the money supply is entirely demand (not supply) determined, summarized in the phrase. Horizontalists versus Verticalists, see Moore (1988). Moore’s position is extreme. Most reject the verticalist interpretation, a stance attributed to much mainstream theory, but allow important roles for credit rationing and rising interest rates in determining outcomes in the financial assets market. It is almost universally argued that meeting demand for funds for investment and now, with credit for all, consumption too, creates deposits. This contrasts with the mainstream view that deposits of present and past saving initiate potential lending by financial intermediaries. The former view was fervently expressed by Keynes: ‘The investment market can become congested through shortage of cash, never … through shortage of saving.’ (C.W., Vol. XIV, 1973, p. 222). Kalecki independently arrived at the same view. Post-Keynesians start from here, responding to new institutional developments and refining, extending the analysis. They reflect the major change James Meade attributed to Keynes: Keynes changed us from looking at the world as a saving dog wagging an investment tail to one in which an investment dog wagged a saving tail.

Within this set of discussions, some stress the stock aspects of money and financial assets, others, the flow aspect of credit as finance for important expenditures. Associated with this distinction are Post-Keynesians concentrating on one period only in their analysis of money—accomodationists. They contrast with structuralists, stressing period by period analysis in the manner of the mature Kalecki and John Hicks. The upshot is to preserve Keynes’s liquidity preference theory when explaining demand for money and financial assets, levels and patterns of interest rates and banks extending credit guided by their liquidity preference, so that not all demand is necessarily accomodated, see Cottrell (1994).

10. Policy

The connection between Post-Keynesian anlaysis and the real world includes a healthy preoccupation with policy. The mean Post-Keynesian’s policy proposals match the mean Bastard Keynesian’s—a slightly left of center package deal of monetary, fiscal and incomes policies, combined with a longer-term commitment to freer trade while preserving protective positions until ‘the time is ripe’ and preference for fixed exchange rates (with institutional means allowing orderly realignments now and then). Revamping Bretton Woods’s structures, to remove built-in contractionary biases, guides suggestions on the international stage. Deregulation of financial markets and ‘freeing up’ of exchange rates unleashed an era of instability following the tranquil experience of ‘the Golden Age of Capitalism.’ This has led to attempts, e.g. the Tobin tax on foreign exchange transactions, to curb the excesses of speculative movements in the foreign exchange markets, stock exchanges, and property markets.

Where Post-Keynesians feel they have the upper hand is in their argument that cumulative causation processes characterize the workings of markets and economic systems. If such processes operate it is harder to argue for beneficial systemic effects from speculation—that it reduces fluctuations and gets the market (system) to underlying long-period equilibrium positions more quickly than otherwise would be the case. If they are not there, speculation makes matters worse. We are led to middle way programs between ruthless laissez faire (but not that competitive) capitalism and authoritarian, inefficient, centrally planned economies. Heinrich Bortis (1997) profoundly analyzed the philosophical, political and economic aspects of these developments. He synthesized three major stands of Post-Keynesianism: the neo-Ricardian approach to capture the longer term aspects of economies’ developments, the Kaleckian-Robinsonian, their cyclical aspects, and the American Post-Keynesians, shortperiod behavior in product and money markets under uncertainty. To this he allied a democratic socialist platform, with philosophical foundations and a comprehensive outline of policy, nationally and internationally. Another stalwart is John Cornwall. Over the years he developed his original theoretical critique of Harrod for supposing that gw and gn were independent of each other and supplemented his analysis of the implications for growth of systemic supply and demand interdependence, with a steady stream of down-to-earth, humane recommendations for institutional reforms, see Harcourt and Monadjemi (1999).

Bortis and Cornwall were influenced by Kaldor. Kaldor’s last book (1996), contains his mature views on how the world works: policy proposals are in the last chapter. He has long emphasized the importance of industrial increasing returns and different pricing behavior as between the (export) products of primary producing countries and countries producing industrial goods. He combined policies for relative stability in exchange rates worldwide with international buffer stock schemes for primary commodities. The latter serve the dual purpose of reducing fluctuations in prices and incomes which damage the economies producing these commodities (and those buying them) while simultaneously providing worldwide liquidity for trade and capital movements, a provision free of disadvantages arising when one major country’s currency performs this role, as happens now.

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