nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2015‒03‒22
sixteen papers chosen by
Karl Petrick
Western New England University

  1. Frederic S. Lee’s contributions to heterodox economics By Tae-Hee Jo; Zdravka Todorova
  2. A critique of full reserve banking By Sheila Dow; Guðrún Johnsen; Alberto Montagnoli
  3. Heterodox economics, social ontology, and the use of mathematics By Mark Setterfield
  4. Debt-driven growth? Wealth, distribution and demand in OECD countries By Engelbert Stockhammer; Rafael Wildauer
  5. The Economic Necessity of Basic Income By Crocker, Geoff
  6. Essentials of Constructive Heterodoxy: Employment By Kakarot-Handtke, Egmont
  7. The Economics of Ethical Consumption By Martha A. Starr
  8. The liquidity preference theory: a critical analysis By Giancarlo Bertocco; Andrea Kalajzic
  9. Theories of finance and financial crisis: Lessons for the Great Recession By Dodig, Nina; Herr, Hansjörg
  10. The Demise of Marx’s Labour Theory of Value and the ‘New Interpretation’: A Recap Note By Ernesto Screpanti
  11. The Debate on Growing Inequality – Implications for Developing Countries and International Co-operation By Jürgen K. Zattler
  12. The formal-informal economy dualism in a retrospective of economic thought since the 1940s By Clement, Christine
  13. Finance-growth nexus: insights from an application of threshold regression model to Malaysia’s dual financial system By Alaaabed, Alaa; Masih, Mansur
  14. Toward an Understanding of Economic Growth in Africa: A Re-Interpretation of the Lewis Model By Xinshen Diao; Margaret McMillan
  15. Dr. Strangelove or how I learnt to stop worrying and love microeconomics: film clips as a pedagogical tool in economic theory By Gregori Gomis, Aleix; Baltar, Fabiola
  16. Is Chile a Model for Economic Development? By Ricardo Ffrench-Davis

  1. By: Tae-Hee Jo (SUNY Buffalo State); Zdravka Todorova
    Abstract: The community of heterodox economists has lost Fred Lee, one of its fervent leaders, who has been at the center of the heterodox movement for the past three decades. The paper delineates Fred Lee’s wide-ranging contributions to heterodox economics focusing on the making of the history and identity of heterodox economics, on heterodox microeconomic theory, and on the analysis of the social provisioning process. What do these contributions mean for heterodox economics? Fred Lee has left us heterodox theories, institutions, and goodwill that will continue developing in the work of economists who are concerned with establishing an alternative critical theory to the status quo.
    Keywords: Frederic S. Lee; heterodox economics; heterodox theory; heterodox microfoundations; heterodox microeconomics; surplus approach.
    JEL: B3 B5 D2 D4 P1
    Date: 2015–03
  2. By: Sheila Dow (Department of Economics, University of Stirling & University of Victoria); Guðrún Johnsen (University of Iceland); Alberto Montagnoli (Department of Economics, University of Sheffield)
    Abstract: Proposals for full reserve banking have been put forward as a radical way of preventing further financial crises. They rest on the argument that crises are caused by excessive money supply growth brought about by inadequately controlled bank credit creation. Our aim is to provide a critique of the theoretical assumptions underlying the plans for full reserve banking. In particular some of the plans rely on the view that the money supply is a key causal variable and that it is feasible for central banks to identify and enforce an optimal quantity. Second, the plans all rely on an unsupported confidence in the efficiency of financial markets outside the centrally controlled banking system. Third, by removing profit-making opportunities from banks, the proposals may unduly tip the balance further in favour of shadow banking. Finally, as the case of 95% liquidity requirements on Kaupthing, Singer and Friedlander in the wake of the Great Financial Crash shows that modern financial engineering makes such policy-making difficult to execute. A Minskyan analysis rather emphasises the inherent instability of the financial system such that it is subject to systemic crises and the indeterminacy of demand for liquidity, while also emphasising the contribution prudent banking can make to financing economic activity and providing a safe money asset. While a return to a traditional separation of retail banking (regulated and supported by the central bank) from investment banking (regulated differently but not supported) would contribute to financial stability, it is argued that the full reserve banking proposals go too far.
    Keywords: bank regulation, full reserve banking
    JEL: E5 G21 G28
    Date: 2015–03
  3. By: Mark Setterfield (Department of Economics, New School for Social Research)
    Abstract: In a recent article (Lawson, 2013), Tony Lawson argues for a Veblenian interpretation of the term “neoclassical”, according to which a neoclassical economist is one whose methodology is at odds with their ontological presuppositions. This leads him to categorize many heterodox economists as neoclassical on the basis that their use of mathematical modeling is at odds with their (implicit) acceptance of an open-systems ontology. The reason is that, according to Lawson, mathematical modeling is deductivist: it presupposes that social systems are closed. The argument advanced in this paper is that this last claim is true only some of the time, and problematic only some of the time that it is true. It therefore amounts to a defense of mathematical modeling by heterodox economists that is, at the same time, sympathetic to Lawson’s claims that the social realm is structured but open and that this ontology is (implicitly) accepted by many heterodox economists.
    Keywords: Mathematical modeling, social ontology, open systems, critical realism, heterodox economics
    JEL: B41 B50 C02
    Date: 2015–03
  4. By: Engelbert Stockhammer (Kingston University); Rafael Wildauer
    Abstract: The paper investigates the effects of changes in the distribution of income and in wealth on aggregate demand and its components. We extend the Bhaduri and Marglin (1990) model to include personal income inequality as well as asset prices and debt. This allows for an evaluation of the wage or profit-led nature of demand regimes, of the expenditure cascade argument (Frank et al. 2010) and several hypotheses regarding the effects of wealth and debt. Our estimates are based on a panel of 18 OECD countries covering the period 1980-2013. For the full panel the average demand regime is found to be wage led. We fail to find effects of personal inequality, but do find strong effects of debt and property prices which have been the major drivers of aggregate demand in the decade prior to the 2007 crisis.
    Keywords: Post-Keynesian economics, wage-led growth, Bhaduri-Marglin model, demand regimes, wealth effect, Veblen effect, expenditure cascade, aggregate demand.
    JEL: E11 E12 E21
    Date: 2015–03
  5. By: Crocker, Geoff
    Abstract: The delinkage of productivity and real wages is the underlying cause of the 2007 economic crisis. As a result of this delinking, consumer income lagged output GDP, and the gap was funded by consumer credit and increased deficit-financed welfare payments. This proved unsustainable, and so led to current austerity policy and GDP cuts. An alternative paradigm is needed in which the financial sector is re-engineered and financial instruments redefined to serve the real economy. Deficient demand and financial deficit are inevitable in advanced technology economies. The only ultimate solution is a basic income funded by QE in proportion to output GDP and not counted as deficit.
    Keywords: basic citizen income
    JEL: E0 E00
    Date: 2015–03–17
  6. By: Kakarot-Handtke, Egmont
    Abstract: Orthodox economics is founded on behavioral assumptions. This has been the wrong starting point because no way leads from there to an understanding of how the economic system works. Critical Heterodoxy is one step ahead insofar as it does not accept the green cheese assumptionism of optimization and supply-demand-equilibrium, yet this is not sufficient to establish a superior paradigm. What we have at the moment is a plurality of debunked theories. This is not a tenable situation. Consequently, Constructive Heterodoxy is focused on the formally consistent reconstruction of central economic phenomena like market, money, profit, and - in this paper - employment.
    Keywords: new framework of concepts; structure-centric; law of supply and demand; price flexibility; structural labor market inertia; income multiplier; stagflation; deflation
    JEL: B59 E24
    Date: 2015–03–12
  7. By: Martha A. Starr
    Abstract: Although there has been little economic research on 'ethical consumption' in a general sense, work on its various aspects is growing. This paper reviews economic research on ethical consumption, examining both demand-and supply-side aspects. It is argued that the most promising way to see ethical consumption through an economic lens is via models with heterogeneous consumers, in which some have strong intrinsic motivation to adopt ethical-consumption practices, others will adopt if they perceive a practice to be becoming a social norm and its extra costs are moderate, and others still will be impervious to it. Implications for the spread of ethical consumption and its ability to affect change are considered.
    Keywords: ethical consumption, consumption ethics, socially responsible consumption, corporate social responsibility, sustainable consumption, consumer behavior, pro-social behavior, consumer economics
    JEL: E21 D11 D12 A13 A12 Q5
    Date: 2015
  8. By: Giancarlo Bertocco (Department of Economics, University of Insubria, Italy); Andrea Kalajzic (Department of Economics, University of Insubria, Italy)
    Abstract: Keynes in the General Theory, explains the monetary nature of the interest rate by means of the liquidity preference theory. The objective of this paper is twofold. First, to point out the limits of the liquidity preference theory. Second, to present an explanation of the monetary nature of the interest rate based on the arguments with which Keynes responded to the criticism levelled at the liquidity preference theory by supporters of the loanable funds theory such as Ohlin and Robertson. It is shown that this explanation is consistent with the definition of the non-neutrality of money that Keynes presented in his 1933 works in which he underlines the need to elaborate a monetary theory of production in order to explain the phenomena of the crisis and the fluctuations in income and employment.
    Date: 2014–01
  9. By: Dodig, Nina; Herr, Hansjörg
    Abstract: This paper presents an overview of different models which explain financial crises, with the aim of understanding economic developments during and possibly after the Great Recession. In the first part approaches based on efficient markets and rational expectations hypotheses are analyzed, which however do not give any explanation for the occurrence of financial crises and thus cannot suggest any remedies for the present situation. A broad range of theoretical approaches analyzing financial crises from a medium term perspective is then discussed. Within this group we focused on the insights of Marx, Schumpeter, Wicksell, Hayek, Fisher, Keynes, Minsky, and Kindleberger. Subsequently the contributions of the Regulation School, the approach of Social Structures of Accumulation and Post-Keynesian approach, which focus on long-term developments and regime shifts in capitalist development, are presented. International approaches to finance and financial crises are integrated into the analyses. We address the issue of relevance of all these theories for the present crisis and draw some policy implications. The paper has the aim to find out to which extent the different approaches are able to explain the Great Recession, what visions they develop about future development of capitalism and to which extent these different approaches can be synthesized.
    Keywords: theories of crisis,Marxian,Institutional,Keynesian,capitalism,finance,financial crisis
    JEL: B14 B15 B24 B25 E11 E12 E13 E32
    Date: 2015
  10. By: Ernesto Screpanti
    Abstract: Marx’s theory of labour value is flawed. This note summarizes the main reasons why this is so. At the same time, it claims that the theory of exploitation does not depend on a labour embodied valuation and can be expounded by resorting to the theory of production prices. Almost all Marxists have now accepted this truth. Most of them have been convinced by a ‘new interpretation’ which has been able to translate the price of net output into an amount of ‘living labour’ and the rate of exploitation into a ratio between unpaid and paid labour. What produced such a surprising result is the use of labour productivity as a numeraire
    Keywords: Marxian Economics, Labour Values, Prices of Production, Theory of Exploitation
    JEL: B14 E11
    Date: 2015–03
  11. By: Jürgen K. Zattler (German Federal Ministry for Economic Cooperation and Development)
    Abstract: A body of recent research is pointing to a growing inequality in many countries. The current debate focuses on high income countries. However, developing countries are an important element in understanding the full picture. First, evidence indicates that growing inequality can also be observed in many developing countries, in particular if top income and wealth evolution is taken into account, a phenomenon which is at variance with conventional economic theory. This has a multitude of economic, political and social implications for the respective countries. In particular, high inequality is linked with political instability, financial fragility and can undermine economic growth. Secondly, developing countries form an increasingly important part of the world economy. Therefore, options to combat inequality must take into account this broader picture. For any solution, one has to understand the driving forces behind growing inequality. Piketty’s central claim is that the free-market system has a natural tendency towards increasing the concentration of wealth. However, there are strong arguments that ever growing inequality is not sustainable in the long-term, in particular because it would eventually slow down economic growth, increase debt levels as well as social and political instability. It is argued in this article that the tendency to accumulate capital at the top seems to lead periodically to unsustainable situations, whereby “external factors” such as wars, technological innovations, government re-distribution and bail-outs can rebalance (and have in fact in the past rebalanced) the system for some time. Governments of developing countries must act on two fronts to contain rising inequality: On the one hand, they have to scale-up domestic resource mobilisation in order to enhance social investments and re-distribution, as many Latin American countries did successfully in the last decade. On the other hand, they must foster the inclusiveness and resilience of their development strategies. Correspondingly, development institutions should go beyond their current focus on extreme poverty and take into account inequality – in terms of general approaches, country support and strategies as well as instruments. Finally, the issue should be adequately taken up within the new “Post-2015” framework.
    Keywords: Inequality; financial stability; developing countries
    JEL: E21 E24 H20
    Date: 2015–03–12
  12. By: Clement, Christine
    Abstract: Central to the scientific debate about the 'informal sector' and the validity of the concept used to be a twofold challenge. The crux laid not only in the objective to explain the widely visible persistence of the informal economy in developing countries, but also in the identification of its roots and the proliferation conditions to be met ex ante. The present paper aims at establishing a link between the theories on informality and marginalization which is another important issue that has arisen within the discussions on the causes of persistent poverty a few years ago. Both concepts are interlinked and self-enforcing. On the macroeconomic level, any economy - be it formal or informal - consists of a set of different economic sectors and any of these sectors basically consists of an accumulation of people on the microeconomic level. Every time one looks at the macro level where political and economic conditions frame the dynamics of the formal and the informal economy, one has at the same time to look at the micro-level where the social and economic conditions determine the incentives for every actor to participate either in the formal, the informal or in both economies. Informality has multiple sources depending on whether the agent took a voluntary choice or had to involuntary opt-out from an institutional system. In this paper, the connection between informality and involuntary exclusion shall be examined in a retrospective of economic thought since the 1940s. The roots of the intertwined concepts of informality and economic exclusion have been laid in the dual economy theories of the 1940s-1950s. Recapitulating the works of Julius BOEKE, Arthur LEWIS, John HARRIS & Michael TODARO, Albert HIRSCHMAN and other socio-economists of that time, it will be argued that one of the necessary reasons for the persistence of the informal economy in developing countries is the dualism in institutional frameworks that leads to the marginalization of social groups and their subsequent exclusion from formal economic activities. By referring to the groundbreaking Africa studies of Keith HART (1971) and the INTERNATIONAL LABOUR ORGANIZATION (1972), special emphasis will be given to the causal reciprocity between informality, marginalization and economic exclusion. The paper closes with a brief overview of current schools of thought that deal very differently with the issue of informality and economic exclusion.
    Keywords: economic dualism,informal sector,informal economy,informality,marginalization,economic exclusion,involuntary exclusion,institutions,inequality,traditional sector,urban rural sector,stages of development,Julius Boeke
    JEL: B20 B25 J64 O15 O17 O43 N90 P16
    Date: 2015
  13. By: Alaaabed, Alaa; Masih, Mansur
    Abstract: The purpose of this paper is to test the growing converging views regarding the destabilizing and growthhalting impact of interest-based debt financial system. The views are as advocated by the followers of Keynes and Hyman Minsky and those of Islam. Islam discourages interest rate based debt financing as it considers that it is not conducive to productive activities and to human solidarity. Likewise, since the onset of the crisis of 2007/2008, calls by skeptics of mainstream capitalism has been renewed, to reconsider the dynamics of the prevailing financial system with emphasis on its untamed credit-creating capacity and link (or rather delink) to real sector transactions. The paper applies a threshold regression model to Malaysian data and finds that the relationship between growth and financial development is non-linear. A threshold is estimated, after which credit expansion negatively impacts GDP growth. While the post-threshold negative relationship is found to be statistically significant, the estimated positive relationship at lower levels of financial development is insignificant. The findings are hoped to provide insights to monetary authorities for better growth-promoting policy-making..
    Keywords: Credit, Financialization, Growth, Threshold Regression Model, Islamic Perspective
    JEL: C22 C58 E44
    Date: 2014–06–20
  14. By: Xinshen Diao; Margaret McMillan
    Abstract: Africa’s recent economic growth is at a historical high. The patterns associated with this growth appear to be quite different from the Asian experiences where rapid growth was fueled by labor intensive, export-oriented manufacturing. Because this pattern differs with our typical view of structural transformation, a heated debate has begun over the sustainability of Africa’s growth. One thing is clear: the recent growth is not well understood. Against this background, we adapt Lewis’s (1954) dual-economy model to the economies of Africa to better understand the role that the “in-between” sector as defined by Lewis (1979) has played in Africa’s recent growth. Our framework incorporates the coexistence of a closed and an open modern economy and takes into account the diversity and heterogeneity of the activities that characterize modern African economies. We apply this framework to the economy of Rwanda to assess Rwanda’s future growth prospects based on different levels of foreign capital inflows. We find that higher foreign inflows lead to significantly more growth in the closed modern economy and stagnant growth in the open modern economy, a phenomenon consistent with recently observed patterns of growth across several African countries.
    JEL: O11 O55
    Date: 2015–03
  15. By: Gregori Gomis, Aleix; Baltar, Fabiola
    Abstract: Microeconomics is perceived by students as one of the toughest subjects they face at the undergraduate level in order to obtain an Economics or Business degree. This is due to a sometimes rather stringent mathematical content, which is essential to teach economic concepts keeping a proper rigorous approach. In this article we present an experience of using a film clip to support teaching in the microeconomics field. In this case, we chose a cut from Stanley Kubricks' film "Dr. Strangelove", which topic is closely related to game theory, an area of knowledge that lies at the core of any intermediate or advanced microeconomics course. The fragment was selected in order to get the maximum subject related content out of the film spending the minimum class time. Methods: The clip was played in front of too different undergraduate level groups, accounting for a total number of 65 students. Results were derived from behavioural observation in a guided debate on the clip's content and the marks obtained by students in a questionnaire that was administrated to them immediately after the film's view. Questions were aimed for the students to connect the content of the film with the concepts previously taught in class. Results: Students proved a higher degree of interest and attention than that shown in other class sessions of the course, both during the view and the following debate on the content. Additionally, questionnaire marks were on average higher than those obtained by students in other tests. On the whole, students proved a better comprehension of the economic concepts involved after the film's view, compared with that shown in previous sessions. Conclusions: Although film views are a rather innovative tool in the area of microeconomics, our experience shows that it can be a useful complement of usual lessons when teaching certain economic concepts that are explained to students on a mathematical basis. In this regard, the film clip used in this paper helped students to get a better understanding of those concepts and boosted their interest on the topic. We believe that the growing trend of media tools use at the undergraduate level must also be implemented gradually in the economic theory field.
    Keywords: Enseñanza Superior; Microeconomía; Métodos Pedagógicos;
    Date: 2014–03
  16. By: Ricardo Ffrench-Davis
    Abstract: The Chilean economy is usually highly praised as a successful one since the imposition of neoliberal reforms, under the dictatorship of general Pinochet in 1973. The fact is that the four decades that have elapsed include sub-periods with quite different policy approaches and notably diverse outcomes. There is neither one unique model nor only one outcome. The four decades growth is moderate, averaging 4.2% per year; during the 16 years of dictatorship averaged 2.9% (meager), during one quarter of a century of democracy, 5.1%, a good performance, but a vigorous 7.1% in the first years (1990-98) and a modest 3.9% in the fifteen more recent years. Sometimes has performed closer to become a “model†for development, sometimes the opposite. Focusing in three episodes (1973-81, 1990-98 and 2008-13), we explore the underlying explanatory variables and some lessons for building “a model for developmentâ€
    Date: 2014–09

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