nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2007‒02‒17
nine papers chosen by
Karl Petrick
University of the West Indies

  1. On the (in-)stability and the endogeneity of the "normal" rate of capacity utilisation in a post-Keynesian/Kaleckian "monetary" distribution and growth model By Eckhard Hein
  2. Interest, debt and capital accumulation - a Kaleckian approach By Eckhard Hein
  3. Wage bargaining and monetary policy in a Kaleckian monetary distribution and growth model: trying to make sense of the NAIRU By Eckhard Hein
  4. Reconsidering the Investment-Profit Nexus in Finance-Led Economies: an ARDL-Based Approach By Till van Treeck
  5. Distribution and growth reconsidered - empirical results for Austria, France, Germany, the Netherlands, the UK and the USA By Eckhard Hein; Lena Vogel
  6. Development & Effective Governance By Lloyd Fernando
  7. AN EMPLOYMENT-TARGETED ECONOMIC PROGRAM FOR SOUTH AFRICA By Robert Pollin; Gerald Epstein; James Heintz; Leonce Ndikumana
  8. "A Theory of Deep Democracy and Economic Justice in the Age of Postmodernism" By Haider A. Khan
  9. Appraising Schumpeter's 'Essence' after 100 Years: From Walrasian Economics to Evolutionary Economics By Esben Sloth Andersen

  1. By: Eckhard Hein (IMK at the Hans Boeckler Foundation)
    Abstract: In Kaleckian models of distribution and growth the equilibrium rate of capacity utilisation may persistently diverge from the ‘normal rate’ of utilisation. We assess this problem following the approach by Dumenil/Levy (1999) who consider the ‘normal rate’ of utilisation in a monetary production economy as the rate which is associated with price stability. Since inflation in our model is driven by distribution conflict, the ‘normal rate’ of utilisation is associated with consistent claims of firms and employees. Taking into account real debt effects of changes in inflation and distribution effects of monetary policy interventions we discuss the short-run stability of the ‘normal rate’ and address the issue of long-run endogeneity. Generally, we show that in a Kaleckian monetary distribution and growth model, which takes the major features of a credit economy seriously, the ‘normal rate’ of capacity utilisation is endogenous to distribution conflict and monetary policy intervention in the long run. And we also show that major Kaleckian results, in particular the paradox of costs, can be retained for the short and the long run.
    Keywords: distribution, growth, capacity utilisation, inflation, monetary policy
    JEL: E12 E22 E25 E52 O42
    Date: 2006–02
  2. By: Eckhard Hein (IMK at the Hans Boeckler Foundation)
    Abstract: In the present paper we explicitly introduce interest payments and debt into a Kaleckian distribution and growth model with an investment function very close to Kalecki’s original writings. The effects of interest rate variations on the short-run equilibrium values of capacity utilisation, capital accumulation and the rate of profit are derived, and the long run effects on the equilibrium debt-capital-ratio are also analysed. It is shown, that the effects of interest variations on the endogenously determined equilibrium values of the model do not only depend on the parameter values in the saving and investment functions but also on the interest elasticity of distribution and in some cases on initial conditions with respect to the interest rate and the debt-capital-ratio. If the conditions for short-run ‘normal’ effects of interest rate variations are given, the economy will be characterised by a long-run unstable debt-capital-ratio and by the macroeconomic ‘paradox of debt’. These results are similar to other models and hint to the robustness of Kaleckian ‘monetary’ models of distribution and growth with respect to the specification of the investment function.
    Keywords: Interest rate, debt, capital accumulation, Kaleckian model
    JEL: E12 E22 E25 E44 O42
    Date: 2005–08
  3. By: Eckhard Hein (IMK at the Hans Boeckler Foundation)
    Abstract: In a Kaleckian monetary distribution and growth model with conflict inflation we assess the role of a Non Accelerating Inflation Rate of Unemployment (NAIRU). The short run stability of a NAIRU is examined taking into account real debt effects of accelerating and decelerating inflation, and the short run effectiveness of monetary policy interventions applying the interest rate tool is analysed. The problem of long run endogeneity of the NAIRU is addressed integrating the long run distribution effects of monetary policies’ real interest rate variations into the model. It is concluded that monetary policy interventions in order to stabilise inflation are either unnecessary or costly in terms of employment in the short run. In the long run, these policies bear the risk of continuously increasing the NAIRU in order to keep inflation under control, which yields a horizontal long run Phillips-curve and latent stagflation. Instead of relying on monetary policies, the cause of inflation should be directly addressed and wage bargaining co-ordination should be applied as an appropriate tool.
    Keywords: Monetary policy, wage bargaining, inflation, distribution, growth
    JEL: E12 E22 E24 E25 E52
    Date: 2005–10
  4. By: Till van Treeck (IMK at the Hans Boeckler Foundation)
    Abstract: A simple Post Keynesian growth model is developed, in which financial variables are explicitly taken into account. Different possible accumulation regimes are derived with respect to changes of these variables. Several variants of an investment function are estimated econometrically. The ARDL-based approach proposed by Pesaran et al. (2001) is argued to be superior for this purpose to the traditional cointegration approach. The econometric results are discussed with respect to a remarkable phenomenon that can be observed for some important OECD countries since the early 1980s: accumulation has generally been declining while profit rates have shown a tendency to rise. The author concentrates on one potential explanation of this phenomenon which is particularly relevant for the USA and relies on the hypothesis of a high propensity to consume out of capital income. The paper also gives an alternative explanation of the so-called "New Economy boom" in the USA at the end of the 1990s.
    Keywords: Investment, Profitability, Financialisation, Time Series Econometrics.
    JEL: C22 D14 E22 E25 G3
    Date: 2007–01
  5. By: Eckhard Hein (IMK at the Hans Boeckler Foundation); Lena Vogel (University of Hamburg (Student))
    Abstract: The authors analyse the relationship between functional income distribution and economic growth in Austria, France, Germany, the Netherlands, the UK and the USA from 1960 until 2005. The analysis is based on a demand-driven distribution and growth model for an open economy inspired by Bhaduri/Marglin (1990), which allows for profit- or wage-led growth. We find that growth in France, Germany, the UK, and the USA has been wage-led, whereas Austria and the Netherlands have been profit-led. In the case of Austria a domestically wage-led economy is turned profit-led when including the effect of distribution on external trade. The Netherlands, however, are already profit-led without external trade. Our results so far only partially confirm Bhaduri/Marglin's (1990) theoretical conclusion that wage-led growth becomes less feasible when the effects of distribution on foreign trade are taken into account. We conclude that following a strategy of profit-led growth via the net export channel, and therefore relying on a kind of 'beggar thy neighbour' policy, is not only harmful for the trading partners and hence for the world economy in the long run, but also for the wage-led countries pursuing such a strategy in the short run.
    Keywords: Distribution, growth, demand-led accumulation regimes
    JEL: E12 E21 E22 E23 E25
    Date: 2007–01
  6. By: Lloyd Fernando
    Abstract: We read today that winds of nationalism are blowing through Latin America. They are blowing across Argentina, Brazil, Chile, Ecuador, Uruguay and Venezuela. Mexico too is expected to join them when it goes to the polls in July. These new regimes are being characterised as leftwing – mostly left of centre – with sympathy in varying degree towards the Cuban revolution. The fundamental problems facing these countries are the same – poverty, unemployment, rising cost of living, regional disparities and mounting youth disillusionment. The pursued solutions are a hybrid of state led interventions in the economy, reflecting a challenge to the Washington Consensus of free markets and privatisation. Here in Sri Lanka, we have a similar situation. The problems are very much the same – poverty, unemployment, rising cost of living, regional disparities and youth disillusionment. But here they are compounded by an ethnic conflict and violence, which makes the challenges more complex and the tasks of dealing with them more daunting. Here too it seems, the Washington consensus has failed. One might argue of course that the reason was lack of consistency of application. But consistency depends also on the socio-political realities and balance of political forces. In a democratic constituency which was replete with elections, it was almost impossible to carryout structural adjustment programmes consistently, since they carried with them all the consequences of relative price adjustments and short-term disruption of life. Further, the free trade dogma carried with it threats to indigenous capital formation and investment, with little or no time for “learning by doing processes”. This is the reason why there has been a fusion of the nationalist movement with aspirations of egalitarianism and socialism.
    Keywords: Development, poverty, Governance, Sri Lanka
  7. By: Robert Pollin (Department of Economics and Political Economy Research Institute, University of Massachusetts-Amherst); Gerald Epstein (Department of Economics and Political Economy Research Institute, University of Massachusetts-Amherst); James Heintz (Department of Economics and Political Economy Research Institute, University of Massachusetts-Amherst); Leonce Ndikumana (Department of Economics and Political Economy Research Institute, University of Massachusetts-Amherst)
    Abstract: This is an independent report produced by a team of international and national consultants supported by the International Poverty Centre in Brasilia (IPC). Initial support for this report was provided by the Poverty Group of the United Nations Development Programme in New York. This report is part of a wider global research programme encompassing several other countries. The views in this report are the authors’ and not necessarily IPC’s. However, the IPC regards this report as an important contribution to the debate on economic policies and employment programmes in South Africa as well as in other countries in Africa. This report outlines a pro-poor, employment-focused economic policy framework for South Africa. Its specific focus is the severe problem of mass unemployment in South Africa today. Unemployment was between 26.5 and 40.5 percent as of March 2005, depending on whether one uses the ‘official’ or ‘expanded’ definition of unemployment (with the expanded definition including so-called ‘discouraged workers’). The paper’s concentration on the problem of mass unemployment is fully consistent with the stated goals of the current African National Congress (ANC) government. At the Growth and Development Summit in 2003, President Thabo Mbeki singled out “more jobs, better jobs, and decent work for all” as one of the country’s four key economic challenges. Currently, the preliminary presentations of the Government’s new economic policy framework, the “Accelerated and Shared Growth Initiative for South Africa (ASGISA)—indicate that it affirms its commitment to cutting the unemployment rate by half by 2014. This publication is a summary of the full report (which is on the website of the Political Economy Research Institute: Following an introductory first section, the full report consists of two short sections that lay out basic concerns, then two substantially longer sections presenting the framework for policy analysis and specific policy proposals. Section 2 presents evidence on the scope of the unemployment problem in South Africa today, considering the unemployed by gender, race, region, length of joblessness and age. It then examines how the country’s problem of mass unemployment can be usefully conceptualized in simple accounting terms—namely, as the result of 1) insufficiency in the rate of output growth, i.e., the economy’s production of goods and services, and 2) a declining number of jobs being created per unit of output. Section 3 examines supply-side perspectives on employment expansion. The fact that the South African economy is experiencing both high unemployment and rising capital intensity of production suggests to some analysts both an explanation for high unemployment and a solution to the problem. For these analysts, the explanation for the problem is straightforward: businesses will not hire more workers because they are convinced that the costs of doing so will exceed the benefits. Businesses therefore choose to either 1) maintain their operations at a lower level than they would if the benefits of hiring more workers exceeded the costs or 2) increase the use of machines in their operations as a substitute for employing workers as their preferred means of expanding their operations. Seen from this perspective, the solution to the problem of unemployment is also straightforward: lower the costs that businesses face in hiring more workers. In general, there are four possible ways in which the costs to businesses of hiring workers could fall: 1) workers receive lower overall compensation, including wages and benefits 2) the industrial relations system and labor market regulations—including laws and regulations regarding workers’ rights to organize, conflict resolution, and hiring and firing—operate with more flexibility for business 3) workers perform their workplace operations at a higher level of productivity or 4) the government absorbs some portion of the costs of hiring workers. In most discussions that consider the sources of unemployment from this business cost-oriented perspective, the focus generally is on the first way to reduce business costs, i.e., to lower wages and benefits for workers relative to both other input costs for production and the prices at which businesses can sell their final products. This study argues that the evidence linking mass unemployment to high labor costs is not persuasive. We also argue that wage cutting as a policy approach is certain to elicit strong resistance, which in turn will worsen the country’s investment climate. At the same time, we do indeed support measures to maintain wage increases in line with productivity growth and to improve the efficiency of the industrial relations system. This report also introduces a proposal for a hybrid program of credit and employment subsidies as a means through which the Government can effectively absorb a share of businesses’ labor costs. Section 4 of the report considers the demand-side forces in South Africa’s economy that will need to be mobilized to achieve faster economic growth and greater labor intensity. In terms of growth, the report discusses all four components of the conventional national income identity that, taken together, define economic growth—i.e., private investment, private consumption, net exports, and government spending. The report places particular stress in this section on the growth-enhancing effects of expanding public infrastructure investments. Indeed, public investment could expand both output and private sector productivity, and could correspondingly increase private investment and export competitiveness. It is significant that the ASGISA program also emphasizes the need for expanded public investment. In considering ways to increase the labor intensity of growth, the report examines two basic approaches. The first is the Expanded Public Works Program (EPWP) now being implemented by the national government. The second approach is to encourage accelerated growth in business activities within South Africa that are capable of generating large increases in employment. The report examines the relative labor intensity of various industries in South Africa as well as the ‘employment multipliers’ of industries, i.e., their capacity to generate relatively large numbers of new jobs through their upstream links with other business firms in the country. Section 5, which concludes the report, considers specific policy tools that can be deployed to promote faster growth, rising labor intensity and greater poverty reduction. It considers policy interventions in the following areas: fiscal policy, monetary policy, credit subsidies, and development banking; capital market and exchange rate controls; inflation control; and sectoral policies in the areas of a) monopolistic pricing and b) promoting growth of selected productivity-enhancing and import-substituting capital-intensive industries, on grounds other than employment benefits.
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2006–06
  8. By: Haider A. Khan (GSIS , University of Denver)
    Abstract: The main purpose of this paper is to offer a somewhat novel theory of deep democracy and economic justice. Part of the novelty consists in considering radical uncertainty and indeterminacy under postmodern conditions. I claim that even under such conditions a plausible theory of deep democracy and economic justice can make sense. The theory of deep democracy presented here makes a distinction between formal aspects of democracy and the deeper structural aspects. In order for democracy to be deep, democratic practices have to become institutionalized in such a way that they become part of normal life ina democratic society. In this sense, ontologically, deep democracy overlaps with Barber's (1984) idea of "strong" democracy. There are, however, epistemological differences as well as differences of emphasis, particularly in the economic spere. I have tried to consider the postmodernist position with regards to democracy and economic justice by paying careful attention to the arguments of leading postmodernists. Barring a nihilism that rules out arguments entirely, such a procedure seems reasonable. Following this procedure, Lyotard's characterization of the discourse on morality and justice as phrase-regimes has been shown to lead to an ethical impasse. His appeal to the Kantian sublime, in this context, would seem to be a category mistake. The aesthetic category of sublime does not fit the requirements of moral judgments even in Kantian terms. Epistemologically, the postmodern dilemma arises from a correct critique of metaphysics and transcendentalism. However, the critique is partial and negative. It is partial in the sense that it does not take the challenge of Kant to develop normativity seriously enough to explore alternatives as Hegel did. It, therefore, pursues entirely the negative critical path leading to thoroughgoing skepticism and nihilism. Derrida's belated attempts to rescue philosophy from a linguistic nihilism may succeed. But it still falls far short of offering a positive account of normativity. A critical overcoming of modernism simply cannot be found in the postmodern turn. I have offered as an alternative to natural law and transcendental norms an account of Hegel's explorations. As Winfield and others have pointed out, this approach is also anti-foundational. However, by following the rational demands of self-determination, it is possible to break out of the vicious circle of skepticism. Instead a progressive structure starting with the minimum structure of freedom as self-determination can be built up. Following this alternative offers a way of exploring deep democracy and economic justice. A concrete set of institutions consistent with the development of self-determination can be seen as necessary for the idea of economic justice to have meaning. In the spheres of production, distribution, exchange, law and contracts among others, the development of appropriate economic institutions allowing this inter-subjective idea of freedom to unfold becomes the thematic development of economic justice. An important problem in this context is the coherence of the concept of the moral subject. By carefully considering poststructuralist psychoanalytical theory of Lacan and others a dynamically oriented approach to the question of the subject becomes possible. Pre-Freudian thinkers such as Hegel or Marx did not see the formation of the individual in all its deeply problematic aspects. However, the "speaking subject," though not innocent (as Helene Cixous wittily put it), is nevertheless capable of agency under specific social and economic conditions. A continuum of subjectivity ending with the fully liberated individual offers various possible levels of moral agency. In an economically and socially unjust setting radical analytic and social interventions will be necessary for these possibilities to materialize. Deep Democrfacy and economic justice, therefore, can be presented as a coherent set of positive requirements. It is part and parcel of the need for rational autonomy in our world. Reasonably enough, even if we choose to call such a world postmodern, a discourse on deep democracy and economic justice is both necessary and possible. It is encouraging to think that such discourses are not just phrase-regimes.
    Date: 2007–02
  9. By: Esben Sloth Andersen
    Abstract: Schumpeter’s unique type of evolutionary analysis can hardly be understood unless we recognise that he developed it in relation to a study of the strength and weaknesses of the Walrasian form of Neoclassical Economics. This development was largely performed in his first book Wesen und Hauptinhalt der theoretischen Nationalökonomie. This German-language book - which in English might be called ‘Essence and Scope of Theoretical Economics’ - was published a century ago (in 1908). Different readings of Wesen provide many clues about the emergence and structure of Schumpeter’s programme for teaching and research. This programme included a modernisation of static economic analysis but he concentrated on the difficult extension of economic analysis to cover economic evolution. Schumpeter thought that this extension required a break with basic neoclassical assumptions, but he tried to avoid controversy by presenting it as only requiring the introduction of innovative entrepreneurs into the set-up of the Walrasian System. Actually, he could easily define the function of his type of entrepreneurs in this manner, but the analysis of the overall process of evolution required a radical reinterpretation of the system of general economic equilibrium. He thus made clear that he could not accept the standard interpretation of the quick Walrasian process of adaptation (tâtonnement). Instead, he saw the innovative transformation of routine behaviour as a relatively slow and conflict-ridden process. This reinterpretation helped him to sketch out his theory of economic business cycles as reflecting the waveform process of economic evolution under capitalism.
    Keywords: Economic statics; evolutionary dynamics; business cycles; Joseph A. Schumpeter; Léon Walras
    JEL: B31 E30 O31
    Date: 2006

This nep-pke issue is ©2007 by Karl Petrick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.