nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2009‒10‒24
twelve papers chosen by
Karl Petrick
University of the West Indies

  1. How Did Macro Theory Get So Far off Track, and what Can Heterodox Macroeconomists Do to Get it Back On Track? By David Colander
  2. Economists, Incentives, Judgment, and the European CVAR Approach to Macroeconometrics By David Colander
  3. "A Perspective on Minsky Moments--The Core of the Financial Instability Hypothesis in Light of the Subprime Crisis" By Alessandro Vercelli
  4. Social Identities By Dietrich Rueschemeyer; Matthias vom Hau
  5. Job Insecurity, Employability, Unemployment and Well-Being By Francis Green
  6. Moving Beyond the Rhetoric of Pluralism: Suggestions for an “Inside-the-Mainstream” Heterodoxy By David Colander
  7. How Economists Got It Wrong: A Nuanced Account By David Colander
  8. The Specificity of Manufacturing in Marx’s Economic Thought By Tregenna, F.
  9. “What is so Austrian about Austrian Economics?” By David Colander
  10. "Banks Running Wild--The Subversion of Insurance by "Life Settlements" and Credit Default Swaps" By Marshall Auerback; L. Randall Wray
  11. "Lessons from the New Deal--Did the New Deal Prolong or Worsen the Great Depression?" By Greg Hannsgen; Dimitri B. Papadimitriou
  12. "An Alternative View of Finance, Saving, Deficits, and Liquidity" By L. Randall Wray

  1. By: David Colander
    Abstract: This paper argues that the ideas that win out in economics are not necessarily those that a representative researcher would choose, but are rather the emergent result of the competition of ideas in which system replicator dynamics dominate. This means that those ideas that fit the analytic technology available to researchers at the time dominate, while “better” ideas that do not offer advancement to researchers lose out. This paper spells out that view. It differentiates a consumer’s understanding of theory from a producer’s understanding of theory, and argues that a consumer’s understanding of theory is often better suited to applied policy than is a producer’s understanding of theory. Because the replicator dynamics of the economics profession does not reward people for acquiring a consumer’s understanding of theory, that understanding is often neglected. Heterodox economists often have a better consumer’s understanding of theory than do mainstream economists but because they do not prepare students to be successful in economic institutional environment, their views do not receive the hearing they should in the profession. The paper offers a number of suggestions for heterodox European macro economists for competing and shaping the economic institutional environment.
    Date: 2009–11
  2. By: David Colander
    Abstract: This paper argues that the DSGE approach to macroeconometrics is the dominant approach because it meets the institutional needs of the replicator dynamics of the profession, not because it is necessarily the best way to do macroeconometrics. It further argues that this “DSGE-theory first” approach is inconsistent with the historical approach that economists have advocated in the past and that the alternative European CVAR approach is much more consistent with economist’s historically used methodology, correctly understood. However, because the European CVAR approach requires explicit researcher judgment, it does not do well in the replicator dynamics of the profession. The paper concludes with the suggestion that there should be an increase in dialog between the two approaches.
    Keywords: methodology, macroeconometrics, general to specific, DSGE, VAR, judgment, incentives
    JEL: C10 A1
    Date: 2009–12
  3. By: Alessandro Vercelli
    Abstract: This paper aims to help bridge the gap between theory and fact regarding the so-called "Minsky moments" by revisiting the "financial instability hypothesis" (FIH). We limit the analysis to the core of FIH--that is, to its strictly financial part. Our contribution builds on a reexamination of Minsky's contributions in light of the subprime financial crisis. We start from a constructive criticism of the well-known Minskyan taxonomy o f financial units (hedge, speculative, and Ponzi) and suggest a different approach that allows a continuous measure of the unit's financial conditions. We use this alternative approach to account for the cyclical fluctuations of financial conditions that endogenously generate instability and fragility. We may thus suggest a precise definition of the "Minsky moment" as the starting point of a Minskyan process--the phase of a financial cycle when many financial units suffer from both liquidity and solvency problems. Although the outlined approach is very simple and has to be further developed in many directions, we may draw from it a few policy insights on ways of stabilizing the financial cycle.
    Keywords: Financial Instability; Financial Fragility; Financial Fluctuations; Subprime Crisis; Minsky Moments; Minsky Meltdown; Speculative Units; Hedge Units; Ponzi Units
    JEL: B50 E32 E44 G28
    Date: 2009–10
  4. By: Dietrich Rueschemeyer; Matthias vom Hau
    Abstract: This paper develops a sociological perspective on the concept of social identities—that is relations of membership recognised as significant by members and outsiders. Social identities encompass face-to-face groups and local communities, as well as large groupings that transcend any conceivable form of direct interaction, as do ethnic groups, social classes, and nations. As collective creations, social identities help to shed light on individual behaviour as well as social outcomes, and are especially critical when analysts seek to understand the chances of collective action. A variety of actors and processes are involved in the creation and recreation of social identities, including commonalities that link up with major life interests; recognition by others, both wanted and unwanted; social conflict with outgroups; initiating entrepreneurs and continuous organisational support; links to socialisation and upbringing; the systematic cultivation of ritual and symbols; and the temporal order of all these processes. Conceptualised this way, social identities crucially link cultural patterns of allegiance and solidarity (as well as of discrimination and rejection) to the actions and dispositions of individuals, groups and organisations and to macro-background conditions such as comprehensive cultural patterns, social inequality, and overarching institutions.
    Date: 2009
  5. By: Francis Green
    Abstract: This paper shows that employability strongly moderates the effects of unemployment and of job insecurity on well-being. I develop a simple framework for employment insecurity and employability with two key features. First, it allows for the risks surrounding unemployment and employment transitions to affect well-being both directly and indirectly through their impact on expected income. Second, the framework allows for the interaction between unemployment and employability, and between job insecurity and employability. Using panel data from Australia, I provide new random effects and fixed effects estimates of the impact of unemployment and of job insecurity on life satisfaction and on mental health, in the context of a model that takes account of the interacting risks. As predicted, unemployed people with little hope of finding a job enjoy the least well-being by a considerable margin, while employed people who are both highly employable and in a secure job enjoy the most. In between there is substantial differentiation according to employability, job insecurity and their interaction. Compared to a secure job the deleterious effects of high job insecurity on well-being are comparable to the effects of unemployment. Both are substantial. The findings are used to compute estimates of the well-being trade-off between increases in job insecurity and increases in employability, relevant to the support of "flexicurity" and similar employment policies.
    Keywords: Life satisfaction; mental health; unemployment; employment; job insecurity; employability; flexicurity; employment insecurity; flexibility
    JEL: J28 J6 I12
    Date: 2009–10
  6. By: David Colander
    Date: 2009
  7. By: David Colander
    Abstract: This paper considers how economists failed society by not preparing society to expect and plan for a possible financial crisis. It argues that the story told by Paul Krugman in his recent NYT Magazine article was too black and white in that it made it look as if Classical economists who were blinded by the beauty of mathematics, are to blame and that Keynesian economics is the path of the future. This paper takes issue with both those claims. It reviews the evolution of economic thinking from Classical to modern times, and shows the Keynesian/Classical terminology misses many of the nuances of policy discussions. It suggests that the solution for the macroeconomics profession isn’t the solution that Krugman suggests it is—to re-embrace Keynes. The solution is to re-embrace the broader Classical economic tradition, and to recognize that Keynes was an important part of that Classical tradition.
    Keywords: Keynes, Classical, Krugman, macroeconomics, crisis, depression
    Date: 2009–09
  8. By: Tregenna, F.
    Abstract: The manufacturing sector has traditionally been regarded, particularly in development economics and in the Kaldorian literature, as having a ‘special role’ as an engine of growth. This article examines Marx’s approach to manufacturing, and the extent to which manufacturing could be considered to have a special place in Marx’s economic thinking, especially in relation to accumulation and growth. It is demonstrated that the precursors of a number of the important ideas in non-Marxian heterodox economics concerning the special properties of manufacturing may actually be found in Marx’s texts. The important ‘progressive’ features of manufacturing identified by Marx include: division of labour; socialisation of labour; mechanisation; increasing returns to scale; learning-by-doing; technological advancement; and overall, superior potential for cumulative productivity increases. But in a difference with Kaldorian-type approaches, for Marx these properties are not only sector-based. We thus suggest an interpretation of Marx as having a twodimensional conceptualisation of activity-specificity, with sectoral and ‘technologicalorganisational’ dimensions.
    Keywords: Marx, Kaldor, manufacturing, growth, cumulative causation
    JEL: B14 B24 B31 B51 L60 O14
    Date: 2009–10–12
  9. By: David Colander
    Abstract: Modern mainstream economics is a plurocracy in which there is no orthodoxy of ideas, only an orthodoxy of method. Given the training it provides its students, mainstream economic’s natural domain is science. With the mainstream’s acceptance of complexity views of the economy, Austrian economist’s views can now get a hearing within the mainstream. Thus, within the science of economics, there is no need for a separate Austrian economics. However, there is a need for Austrian economics in political economy, that branch of economics that takes the insights of science and relates them to policy. The paper urges Austrian economics to embrace political economy as its domain, and to position its work as within political economy.
    Date: 2009–10
  10. By: Marshall Auerback; L. Randall Wray
    Abstract: Oblivious to any lessons that might have been learned from the global financial mess it has created, Wall Street is looking for the next asset bubble. Perhaps in the market for death it has found a replacement for the collapsed markets in subprime mortgage–backed securities and credit default swaps (CDSs). Instead of making bets on the "death" of securities, this new product will allow investors to gamble on the death of human beings by purchasing "life settlements"--life insurance policies that the ill and elderly sell for cash. These policies will then be packaged together as bonds—securitized—and resold to investors, who will receive payouts when the people with the insurance die. In effect, just as the sale of a CDS creates a vested interest in financial calamity, here the act of securitizing life insurance policies creates huge financial incentives in favor of personal calamity. The authors of this Policy Note argue that this is a subversion--or an inversion--of insurance, and it raises important public policy issues: Should we allow the marketing of an instrument in which holders have a financial stake in death? More generally, should we allow the "innovation" of products that condone speculation under the guise of providing insurance?
    Date: 2009–10
  11. By: Greg Hannsgen; Dimitri B. Papadimitriou
    Abstract: Since the current recession began in December 2007, New Deal legislation and its effectiveness have been at the center of a lively debate in Washington. This paper emphasizes some key facts about two kinds of policy that were important during the Great Depression and have since become the focus of criticism by new New Deal critics: (1) regulatory and labor relations legislation, and (2) government spending and taxation. We argue that initiatives in these policy areas probably did not slow economic growth or worsen the unemployment problem from 1933 to 1939, as claimed by a number of economists in academic papers, in the popular press, and elsewhere. To substantiate our case, we cite some important economic benefits of New Deal–era laws in the two controversial policy areas noted above. In fact, we suggest that the New Deal provided effective medicine for the Depression, though fiscal policy was not sufficiently countercyclical to conquer mass unemployment and prevent the recession of 1937–38; 1933's National Industrial Recovery Act was badly flawed and poorly administered, and the help provided by the National Labor Relations Act of 1935 came too late to have a big effect on the recovery.
    Keywords: New Deal; Public Works Projects; NIRA; NLRA; Cartelization; Unions; Labor Relations Policy; Fiscal Policy; Fiscal Stimulus; Unemployment; Great Depression
    JEL: E20 E62 J58 L43 N12
    Date: 2009–10
  12. By: L. Randall Wray
    Abstract: This paper contrasts the orthodox approach with an alternative view on finance, saving, deficits, and liquidity. The conventional view on the cause of the current global financial crisis points first to excessive United States trade deficits that are supposed to have "soaked up" global savings. Worse, this policy was ultimately unsustainable because it was inevitable that lenders would stop the flow of dollars. Problems were compounded by the Federal Reserve's pursuit of a low-interest-rate policy, which involved pumping liquidity into the markets and thereby fueling a real estate boom. Finally, with the world awash in dollars, a run on the dollar caused it to collapse. The Fed (and then the Treasury) had to come to the rescue of U.S. banks, firms, and households. When asset prices plummeted, the financial crisis spread to much of the rest of the world. According to the conventional view, China, as the residual supplier of dollars, now holds the fate of the United States, and possibly the entire world, in its hands. Thus, it's necessary for the United States to begin living within its means, by balancing its current account and (eventually) eliminating its budget deficit. I challenge every aspect of this interpretation. Our nation operates with a sovereign currency, one that is issued by a sovereign government that operates with a flexible exchange rate. As such, the government does not really borrow, nor can foreigners be the source of dollars. Rather, it is the U.S. current account deficit that supplies the net dollar saving to the rest of the world, and the federal government budget deficit that supplies the net dollar saving to the nongovernment sector. Further, saving is never a source of finance; rather, private lending creates bank deposits to finance spending that generates income. Some of this income can be saved, so the second part of the saving decision concerns the form in which savings might be held—as liquid or illiquid assets. U.S. current account deficits and federal budget deficits are sustainable, so the United States does not need to adopt austerity, nor does it need to look to the rest of the world for salvation. Rather, it needs to look to domestic fiscal stimulus strategies to resolve the crisis, and to a larger future role for government in helping to stabilize the economy.
    Keywords: Finance; Saving; Budget Deficits; Current Account Deficits; Financial Crisis
    JEL: E12 E21 E22 E42 E63 F32
    Date: 2009–10

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