nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2014‒11‒17
fourteen papers chosen by
Karl Petrick
Western New England University

  1. A Post-Keynesian Response to Piketty's "Fundamental Contradiction of Capitalism" By Javier Lopez Bernardo; Felix Lopez Martinez; Engelbert Stockhammer
  2. Conspicuous Consumption and Peer Effects among the Poor: Evidence From a Field Experiment By Christopher P Roth
  3. The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment By Kakarot-Handtke, Egmont
  4. Three Images of Trade: On the Place of Trade in a Theory of Global Justice By Risse, Mathias; Wollner, Gabriel
  5. Governing by Panic: The Politics of the Eurozone Crisis By David M. Woodruff
  6. Child Poverty and the Great Recession in the United States By Marianne Bitler; Hilary Hoynes; Elira Kuka; UNICEF Innocenti Research Centre
  7. Young People (not) in the Labour Market in Rich Countries during the Great Recession By Dominic Richardson; Yekaterina Chzhen; UNICEF Innocenti Research Centre
  8. The Golden Rule of Capital Accumulation and Global Recession. Aggregate Production Function and the Cambridge Capital Controversy. By Yashin, Pete
  9. Does Fiscal Consolidation Really Get You Down? Evidence from Suicide Mortality By Antonakakis, Nikolaos; Collins, Alan
  10. Great Expectations: The Persistent Effect of Institutions on Culture By Litina, Anastasia
  11. Reforms in Institutional Finance for Inclusive Growth By Swamy, Vighneswara
  12. Do people care for a sustainable future? Evidence from happiness data. By Bartolini, Stefano; Sarracino, Francesco; Theis, Laurent
  13. The Greener the Better: Job Creation and Environmentally- Friendly Technological Change By Luisa Gagliardi; Giovanni Marin; Caterina Miriello
  14. Bubbles and Central Banks: Historical Perspectives By Markus K. Brunnermeier; Isabel Schnabel

  1. By: Javier Lopez Bernardo (Kingston University); Felix Lopez Martinez; Engelbert Stockhammer
    Abstract: In Capital in the Twenty-First Century, the French economist Thomas Piketty develops a new and rich set of data that deals with income and wealth distribution, output-wealth dynamics and rates of return, and has proposed as well some "laws of capitalism". At the core of his theoretical argument lies the "fundamental inequality of capitalism", an empirical regularity that states that the rate of return on wealth is higher than the growth rate of the economy. This simple construct allows him to conclude that increasing wealth (and income) inequality is an inevitable outcome of capitalism. While we share some of his conclusions, we will highlight some shortcomings of his approach based on a Cambridge post-Keynesian growth-and-distribution model. We argue, first, that r>g (i.e. that the rate of return on wealth is greater than the growth rate of the economy) is not necessarily associated with increasing inequality in functional distribution; second, Piketty commits a fallacy-of-composition argument when he says that the necessary condition for r>g is that capitalists have to save a high amount of their capital income; third, post-Keynesian economists can learn from Piketty’s insights about personal income distribution and incorporate them into their models; and, fourth, we reiterate the post-Keynesian argument that a well-behaved aggregate production function does not exist and it therefore cannot explain the distribution of income.
    Keywords: Rate of return, income distribution, post-Keynesian growth and distribution models, Cambridge equation, Pasinetti's theorem
    JEL: B22 B50 E12 O40
    Date: 2014–10
  2. By: Christopher P Roth
    Abstract: I use a randomised conditional cash transfer program from Indonesia to provide evidence on peer effects in consumption of poor households. I combine this with consumption visibility data from Indonesia to examine whether peer effects in consumption differ by a good’s visibility. In line with a model of conspicuous consumption, I find that the expenditure share of visible (nonvisible) goods rises (falls) for untreated households in treated sub-districts, whose reference group visible consumption is exogenously increased. Finally, I provide evidence on the mechanisms underlying the estimated spillovers using data on social interactions and social punishment norms. In line with Veblen’s (1899) claim that conspicuous consumption is more prevalent in societies with less social capital, I show that the peer effects in visible goods are larger in villages and for households with lower levels of social activities.
    Keywords: Conspicuous Consumption, Peer Effects, Relative Concerns, Spillovers,Social Interactions, Social Norms
    JEL: D12 C21 I38
    Date: 2014
  3. By: Kakarot-Handtke, Egmont
    Abstract: Axiomatization is the prime task of theoretical economics. Without correct axioms,no correct theory. Without correct theory, no understanding of how the economy works. Without empirically corroborated understanding, no useful economic policy advice. Yet, much more important than any political reputation of economics is indeed: without correct axioms, no acceptance as science. There is no way around it, neither for Orthodoxy nor for Heterodoxy. The conceptual consequence of this paper is to discard the subjective-behavioral axioms and to take objective-structural axioms as the formal point of departure. This enables the rectification of the most fatal analytical mistakes of conventional economics.
    Keywords: new framework of concepts; structure-centric; axiom set
    JEL: B49 B59 E10
    Date: 2014–09–02
  4. By: Risse, Mathias (Harvard University); Wollner, Gabriel (London School of Economics and Political Science)
    Abstract: Economic theory teaches us that it is in every country's own best interest to engage in trade. Trade therefore is a voluntary activity among consenting parties. On this view, considerations of justice have little bearing on trade, and political philosophers concerned with matters of global justice should stay largely silent on trade. According to a very different view that has recently gained some prominence, international trade can only occur before the background of an existing international market reliance practice that is shaped by states. On this view, trade is a shared activity among states, and all participating states have in principle equal claims to the gains from trade. Trade then becomes a central topic for political philosophers concerned with global justice. The authors find fault with both of those views and argue instead for a third view about the role of a trade in a theory of global justice. That view gives pride of place to a (non-Marxian) notion of exploitation, which is developed here in some detail.
    Date: 2014–02
  5. By: David M. Woodruff
    Abstract: The Eurozone’s reaction to the economic crisis beginning in late 2008 involved both efforts to mitigate the arbitrarily destructive effects of markets and vigorous pursuit of policies aimed at austerity and deflation. To explain this paradoxical outcome, this paper builds on Karl Polanyi’s account of how politics reached a similar deadlock in the 1930s. Polanyi argued that democratic impulses pushed for the protective response to malfunctioning markets. However, under the gold standard the prospect of currency panic afforded great political influence to bankers, who used it to push for austerity, deflationary policies, and the political marginalization of labor. Only with the achievement of this last would bankers and their political allies countenance surrendering the gold standard. The paper reconstructs Polanyi’s theory of “governing by panic” and uses it to explain the course of the Eurozone policy over three key episodes in the course of 2010-2012. The prospect of panic on sovereign debt markets served as a political weapon capable of limiting a protective response, wielded in this case by the European Central Bank (ECB). Committed to the neoliberal “Brussels-Frankfurt consensus,” the ECB used the threat of staying idle during panic episodes to push policies and institutional changes promoting austerity and deflation. Germany’s Ordoliberalism, and its weight in European affairs, contributed to the credibility of this threat. While in September 2012 the ECB did accept a lender-of-last-resort role for sovereign debt, it did so only after successfully promoting institutional changes that severely complicated any deviation from its preferred policies.
    Keywords: Euro, European Central Bank (ECB), austerity, lender of last resort, Ordoliberalism, gold standard
    Date: 2014–10
  6. By: Marianne Bitler; Hilary Hoynes; Elira Kuka; UNICEF Innocenti Research Centre
    Abstract: In the midst of the Great Recession, median real household income fell from $61,597 in 2007 to $57,025 in 2010 and $51,007 in 2012. Given that the effects of the Great Recession on unemployment were greater for less skilled workers the authors expect the effects of the Great Recession on household incomes to be larger in relative terms for individuals in the lower end of the income distribution. To explore this issue, in this paper, they comprehensively examine the effects of the Great Recession on child poverty.
    Keywords: child well-being; economic and social conditions; economic crisis; monetary policy;
    Date: 2014
  7. By: Dominic Richardson; Yekaterina Chzhen; UNICEF Innocenti Research Centre
    Abstract: The global financial crisis of 2007/2008 spilled over into the real economy reducing demand for labour and increasing unemployment. Young people were hit hard, with record numbers of 15-24-year-olds out of work and many of them not in education, employment or training (NEET). More than five years since the outbreak of the financial crisis, the economic recovery remains weak and uneven. The study documents a substantial worsening in the youth labour market situation during the Great Recession across the EU and/or OECD, particularly in countries that suffered greater falls in economic output per capita.
    Keywords: european union; temporary employment; unemployment; youth;
    JEL: J13 J24 J64
    Date: 2014
  8. By: Yashin, Pete
    Abstract: A new macroeconomic model is presented, which makes it possible to take a fresh look both at the long-term equilibrium growth process and at short-term deviations from it. Its key hypothesis is investment-to-profits equality. This hypothesis has classical roots and corresponds to the Ricardian and Marx approach and coincides with Phelps’ Golden Rule of capital accumulation as well as with Uzawa’s classical hypothesis. Under this assumption the long-term output growth rate is determined by the rate of capital accumulation, which in turn is equal to the net profit rate. The profit rate value is the result of a trade-off between workers and proprietors. The relationship between aggregate output and inputs is analytically derived in this paper where the variable values are measured not in physical units, but in the current monetary cost. It has the Cobb-Douglas functional form but is neither neoclassical production function nor technical relationship, which could specify the maximum output obtainable from a given set of inputs. The exponent of capital in the resulting function is equal to the investment rate, whose current value is not constant in time. So the output is no longer an unalterable function of inputs, and its shape can vary. The ‘production function’ shift parameter, which is commonly associated with the level of technology, may be expressed in terms of the wage level. The reasons for the 2007–2008 global recession have been clarified.
    Keywords: neoclassical theorem, Uzawa classical hypothesis, Cobb-Douglas function, Uzawa theorem, Uzawa capital intensity condition, business cycle, Harrod-Domar model, accounting identity, path-dependent equilibria, aggregation problems
    JEL: E10 E11 E20
    Date: 2014–09–14
  9. By: Antonakakis, Nikolaos; Collins, Alan
    Abstract: While linkages between some macroeconomic phenomena (e.g. unemployment, GDP growth) and suicide rates in some countries have been explored, only one study, hitherto, has established a causal relationship between fiscal consolidation and suicide, albeit in a single country. This study examines the impact of budget consolidation on suicide mortality across all Eurozone peripheral economies, while controlling for various economic and socio-demographic differences. The impact of fiscal adjustments is found to be gender, age and time specific. In particular, fiscal consolidation has short-, medium- and long-run suicide increasing effects on the male population between 65 and 89 years of age. A one percentage point reduction in government spending is associated with an 1.39%, 2.35% and 2.64% increase in the short-, medium- and long-run, respectively, of male suicides rates between 65 and 89 years of age in the Eurozone periphery. These results are highly robust to alternative measures of fiscal consolidation. Unemployment benefits and substantial employment protection legislation seem to mitigate some of the negative effects of fiscal consolidation on suicide mortality. Plausible explanations for these impacts are provided and policy implications drawn.
    Keywords: Fiscal consolidation, Suicide, Eurozone periphery, Government policy, Labour market institutions
    JEL: C33 H30 H51 H55 H62 I18 I31
    Date: 2014–09–11
  10. By: Litina, Anastasia
    Abstract: This research exploits the event of immigration to establish that institutions have a persistent effect on culture. It is argued that immigrants coming from corrupt countries, tend to overtrust the institutions at the host country. This inflated trust of immigrants is documented as the Great Expectations effect. This result is interesting and intriguing for several reasons. First, it highlights the persistent effect of institutions (at the origin country) on the cultural attitudes of immigrants. Interestingly, this effect is rather persistent and can be detected even to the second generation immigrants. Second, the analysis explores whether mean attitudes at the origin country have an effect on immigrants' attitude. The findings suggest that mean attitudes do not confer a statistically significant effect, whereas a horserace between origin institutions and origin culture suggests that it is the effect of institutions that prevails. Last, the analysis establishes that the inflated trust of immigrants affects their political attitudes. Immigrants coming from corrupt countries tend to be less interested in politics, to overtrust the host governments and to be less active in the political arena. In a globalized world where international immigration is rather extensive, pinning down the cultural differences across immigrants and thus the differences in their political attitudes is of an essence.
    Keywords: Trust, Institutions, Culture, Migration
    JEL: F22 O17
    Date: 2014–09–16
  11. By: Swamy, Vighneswara
    Abstract: This paper analyses the need, significance and the advantages of ‘reforms in institutional finance for inclusive growth’ in the context of Indian economy and offers some practicable suggestions from the functional perspective. India’s Rural Financial Architecture (RFA) is subject to systemic policy issues and pervasive institutional weaknesses. Lack of autonomy and weak governance and unseen accountability have affected the sustainability of Rural Financial Institutions (RFI) and resulted in constrained outreach. Importance of access to institutional finance for the poor arises from the problem of financial exclusion of nearly 3 billion people from the formal financial services across the world. With only 34% of population engaged in formal banking, this paper argues that the reforms in institutional finance coupled with governance reforms in India’s RFA would greatly benefit the economy in making available the much-needed financial services to the poor and the neglected sections of the society and facilitate the efforts towards achieving inclusive growth.
    Keywords: Development finance; Financial system, Rural financial institutions, Poverty; Governance; Reforms
    JEL: D53 G2 G21 G28 O16 O43 P21 Q14
    Date: 2014
  12. By: Bartolini, Stefano; Sarracino, Francesco; Theis, Laurent
    Abstract: While the various streams of environmentalism agree in claiming that the current patterns of economic activity are unsustainable for natural resources, they disagree in answering the following question: who is the responsible? Two different answers have been provided: the people or the socio-economic system. The first answer claims that people are inter-temporally greedy. Unsustainable economic patterns simply reflect the little importance that current generations attribute to the living standard of future generations. According to the second answer instead, people would prefer a more sustainable path of the economy but some failure of the socio-economic system prevent this outcome. We provide a test of the basic hypothesis on which these two views diverge: the degree of people’s concern for the conditions of life of future generations. We derive this information by estimating the relationship between people’s current subjective well-being and their expectations about the living standard of future generations, i.e. a future far enough to concern only future generations. According to the first view, people’s expectations about the future should have weak or null influence on people’s current well-being. On the contrary, the second view implies that such influence should be positive and remarkable. We use various international and national survey data to estimate a standard happiness regression augmented with people’s expectation about the future. Results suggest that current well-being is sharply and negatively associated to a negative expectation of the future. Where possible, we use 2SLS to account for possible endogeneity between the expectations about the future and current well-being. We find that expecting the worst (the best) for future generations has a very large negative (positive) impact on subjective well-being. This conclusion supports the view that current problems of sustainability are due to some failure of the socio-economic organization and not to the inter-temporal greed of human beings.
    Keywords: Sustainability, well-being, life satisfaction, Endogenous Growth, economic growth, discount rate, happiness, intergenerational equity, time preference.
    JEL: D62 D64 D91 I31
    Date: 2014–05–22
  13. By: Luisa Gagliardi; Giovanni Marin; Caterina Miriello
    Abstract: This paper investigates the link between environment related innovation and job creation at firm level. Employing Italian data on 4,507 manufacturing firms, matched with patent records for the period 2001-2008, we test whether “green” innovation, measured using the number of environment related patents, has a positive effect on long run employment growth that is specific with respect to non environmental innovation. Results show a strong positive impact of “green” innovation on long run job creation, substantially bigger than the effect of other innovations. Our findings are robust to a number of additional tests including controls for cost differential between generic and “green” innovation and endogeneity.
    Keywords: Technological Change, Eco-Innovation, Employment
    JEL: O33 Q55 J21
    Date: 2014
  14. By: Markus K. Brunnermeier (Princeton University); Isabel Schnabel
    Abstract: This paper reviews some of the most prominent asset price bubbles from the past 400 years and documents how central banks (or other institutions) reacted to those bubbles. The historical evidence suggests that the emergence of bubbles is often preceded or accompanied by an expansionary monetary policy, lending booms, capital inflows, and financial innovation or deregulation. We find that the severity of the economic crisis following the bursting of a bubble is less linked to the type of asset than to the financing of the bubble – crises are most severe when they are accompanied by a lending boom, high leverage of market players, and when financial institutions themselves are participating in the buying frenzy. Past experience also suggests that a purely passive “cleaning up the mess” stance towards inflating bubbles in many cases is costly. At the same time, while interest - rate leaning policies and macroprudential tools can and sometimes have helped to deflate bubbles and mitigate the associated economic crises, the correct implementation of such proactive policy approaches remains fraught with difficulties.
    Date: 2014–10–31

This nep-pke issue is ©2014 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.