nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2012‒07‒23
eight papers chosen by
Karl Petrick
University of the West Indies

  1. "Toward an Understanding of Crises Episodes in Latin America: A Post-Keynesian Approach" By Esteban Perez Caldentey; Matias Vernengo
  2. The macroeconomic impact of organized crime: a neo-Kaleckian perspective By Capuano, Carlo; Purificato, Francesco
  3. Missing the Story: The OECD's Analysis of Inequality By David Rosnick; Dean Baker
  4. Circuit theory extended: The role of speculation in crises By Lancastle, Neil
  5. Marx: From Hegel and Feuerbach to Adam Smith By Eric Rahim
  6. The Governance Gap: Globalization and the Crisis of Democracy in the West By Charles A. Kupchan
  7. Ecological Economics By David Stern
  8. Who Needs the Nation State? By Rodrik, Dani

  1. By: Esteban Perez Caldentey; Matias Vernengo
    Abstract: Conventional wisdom about the business cycle in Latin America assumes that monetary shocks cause deviations from the optimal path, and that the triggering factor in the cycle is excess credit and liquidity. Further, in this view the origin of the contraction is ultimately related to the excesses during the expansion. For that reason, it follows that avoiding the worst conditions during the bust entails applying restrictive economic policies during the expansion, including restrictive fiscal and monetary policies. In this paper we develop an alternative approach that suggests that fiscal restraint may not have a significant impact in reducing the risks of a crisis, and that excessive fiscal conservatism might actually exacerbate problems. In the case of Central America, the efforts to reduce fiscal imbalances, in conjunction with the persistent current account deficits, implied that financial inflows, with remittances being particularly important in some cases, allowed for an expansion of a private spending boom that proved unsustainable once the Great Recession led to a sharp fall in external funds. In the case of South America, the commodity boom created conditions for growth without hitting the external constraint. Fiscal restraint in the South American context has resulted, in some cases, in lower rates of growth than what otherwise would have been possible as a result of the absence of an external constraint. Yet the lower reliance on external funds made South American countries less vulnerable to the external shock waves of the Great Recession than Central American economies.
    Keywords: Business Fluctuations; Great Recession; Latin America
    JEL: E32 E65 O54
    Date: 2012–07
  2. By: Capuano, Carlo; Purificato, Francesco
    Abstract: The paper analyzes how organized crime affects the economy through its impact on the effective demand, following the Neo-Kaleckian approach. From this perspective, the presence of organized crime, on the one hand, tends to reduce the effective demand draining resources through extortion, bribery of public officials and encouraging consumption of criminal goods (illegal goods and goods produced in the underground economy), on the other hand, tends to increase the effective demand using the proceeds of criminal activity in the purchase of legal consumption and investment goods. The model highlights the opposing action of these two forces and identifies the conditions for a negative impact on the degree of capacity utilization and the growth rate. For the latter, these conditions tend to be more stringent, due to the direct impact of organized crime on investment decisions. Overall, the operation of organized crime tends to negatively influence the economic activity to the extent that the income drained from the legal sector is not reused into the same sector.
    Keywords: Neo-Kaleckian; macroeconomics; organized crime; illegal or illicit markets
    JEL: E12 E2 O17 K4
    Date: 2012–07
  3. By: David Rosnick; Dean Baker
    Abstract: The OECD recently published a lengthy volume examining the causes of rising inequality in most wealthy countries over the last three decades. This paper examines that study, finding that the OECD misses most of the story of inequality because its primary focus is the ratio of the annual wage of the 90th percentile worker to the 10th percentile worker, while most of the benefits of rising inequality were concentrated much further up the income ladder. In contrast to the OECD, this paper finds that the impact of technology is negligible and actually trivially negative over the period examined. It also finds many errors in the use of data in the OECD’s study, most importantly by exaggerating the number of independent observations when many of the data points are simply extrapolations. This causes the OECD to exaggerate the statistical significance of its findings. Finally, this paper suggests that the growth of the financial sector may have been an important factor contributing to the growth in inequality over the past 30 years.
    Keywords: inequality, financial services,
    JEL: D D6 D63 D3 D31 O O3 O33 G G2
    Date: 2012–07
  4. By: Lancastle, Neil
    Abstract: This paper asks why modern finance theory and the efficient market hypothesis have failed to explain long-term carry trades; persistent asset bubbles or zero lower bounds; and financial crises. It extends Keen (Solving the Paradox of Monetary Profits, 2010) and the Theory of the Monetary Circuit to give a mathematical representation of Minsky's Financial Instability Hypothesis. In the extended model, the central bank rate is not neutral and the path is non-ergodic. The extended circuit has survival constraints that include a living wage, a zero interest rate and an upper interest rate. Inflation is everywhere. The possibility of a high interest rate, hedge economy emerges, where powerful banks invest surplus loan interest. With speculation, banks lobby to enter investment markets and the system is precariously liquid/illiquid. The paradox of a Ponzi economy, where loans never get repaid, is that private banks must speculate to increase reserves and rely on systemic crises to rebuild their balance sheets. Estimating model parameters for the US gives a scissor-graph like the The Financial Crisis Inquiry Commission (The Financial Crisis Inquiry Report, 2011) with other nuances, namely i) a heart attack in 1973-1974 that corresponds to the collapse of Bretton Woods ii) an accelerated decoupling of household wages and loans after the repeal of Glass-Steagall. Simulating bank bailouts, household bailouts and a Keynesian boost suggests that bank bailouts are the least effective intervention, with downward pressure on wages and household spending. Bailing out hedge households is a form of monetary contraction, and boosting hedge business loans is a form of monetary expansion. The appropriate policy choice would seem to depend on the external balance and inflation concerns. The paper concludes that, with international Ponzi sectors, viable resolution mechanisms include reparations (dL < 0), turning Ponzi debt into equity or junk debt (dL → ∞), household bailouts and a Keynesian boost. --
    Keywords: circuit theory,macroeconomic simulation,carry trade,banking regulation,interest rate policy
    JEL: E10 E27 E43 E58 E60
    Date: 2012
  5. By: Eric Rahim (Department of Economics, University of Strathclyde)
    Abstract: This paper discusses the development of Marx’s thought over a period of something like fifteen months, between the spring of 1843 and the autumn of 1844. The focus of the paper is Marx’s first encounter with classical political economy as he found it in the Wealth of Nations. The outcome of this encounter was presented by Marx in his Economic and Philosophical Manuscripts of 1844. It is argued here that in the classical theory, with which he had hitherto been largely unfamiliar, Marx found all the elements he needed to synthesise the philosophical standpoint he had developed in the preceding months with political economy. The Manuscripts represent the first crucial stage in the development of this synthesis. This first encounter of Marx with classical political economy, and his first steps in the development of his synthesis, have received hardly any attention in the literature. The present paper seeks to fill this gap.
    Date: 2012–06
  6. By: Charles A. Kupchan
    Abstract: A crisis of governability has engulfed the world's industrialized democracies. It is not coincidental that the United States, Europe, and Japan are simultaneously experiencing political breakdown. Rather, globalization is a common culprit. Across the West's open societies, globalization is producing a widening gap between what electorates are asking of their governments and what those governments are able to deliver. This mismatch between the growing demand for good governance and its shrinking supply is dangerously compromising the power and purpose of the Western world.
    Keywords: globalization; governance
    Date: 2012–02–15
  7. By: David Stern (The Australian National University (ANU) - Crawford School of Public Policy)
    Abstract: Ecological economics is a relatively new interdisciplinary field concerned with the relationship between economic systems and the biological and physical world. This article covers the following topics: A discussion of views on whether ecological economics is just a field or approach within economics or a new ÒtransdisciplinaryÓ field in its own right; Origin of the name of the field; Core common principles of ecological economics; Comparison with environmental economics; Applications; History and institutions of ecological economics. The core principles are that the economy is embedded and dependent upon the ecosphere and that, therefore, models of the economy have to comply with biophysical principles. Ecological economists believe that there are limits to our ability to substitute human-made inputs and knowledge for natural resources and the environment in both production and consumption. They also argue that economic policy must consider jointly the objectives of economic efficiency, equity, and sustainability.
    JEL: Q57
    Date: 2012–05
  8. By: Rodrik, Dani
    Abstract: The design of institutions is shaped by a fundamental trade-off. On the one hand, relationships and heterogeneity push governance down. On the other, the scale and scope benefits of market integration push governance up. A corner solution is rarely optimal. An intermediate outcome, a world divided into diverse polities, is the best that we can do.
    Keywords: Globalization; Nation State
    JEL: F0 H41
    Date: 2012–07

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