nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2016‒10‒16
ten papers chosen by
Karl Petrick
Western New England University

  1. Institutions as Emergent Phenomena: Redefining Downward Causation By Nicolas Brisset
  2. Econometrics as a Pluralistic Scientific Tool for Economic Planning: On Lawrence R. Klein's Econometrics By Erich Pinzón-Fuchs
  3. Economic Crisis, Economic Methodology and the Scientific Ideal of Physics By Drakopoulos, Stavros A.
  4. Macroeconometric modeling as a "photographic description of reality" or as an "engine for the discovery of concrete truth" ? Friedman and Klein on statistical illusions By Erich Pinzón-Fuchs
  5. On Performativity: Option Theory and the Resistance of Financial Phenomena By Nicolas Brisset
  6. Liquidity Traps and Large-Scale Financial Crises By Giovanni Caggiano; Efrem Castelnuovo; Olivier Damette
  7. Criticizing the Lucas Critique: Macroeconometricians’ Response to Robert Lucas By Aurélien Goutsmedt; Erich Pinzon-Fuchs; Matthieu Renault; Francesco Sergi
  8. What are production, work and consumption? Trans-historical re-conceptualisations By Edvinsson, Rodney
  9. Macroeconomic effects of consumer debt: three theoretical essays By Olivier Allain
  10. Social protection systems in Latin America : an assessment By Ocampo, José Antonio.; Gómez-Arteaga, Natalie.

  1. By: Nicolas Brisset (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: The concept of emergence is frequently used in the social sciences in order to characterize social institutions. Nevertheless, philosophy of mind argues that the idea of emergence is problematic because it encompasses the dubious notion of downward causation, i.e. the fact that an entity at a given ontological level might have a causal influence on lower level entities. This work shows that although it is problematic in some fields, emergence is an ontological feature of the social world. In order to justify this point of view and to show how institutions relate to individuals' actions, we define an institution as an exogenous device, which enables us to show that the relationship between institution and individual actions is not only a causal one but also an intersubjective and a constitutive one.
    Keywords: Emergent Phenomena, Institution, Downward Causation, Convention
    JEL: B52 B41
    Date: 2016–10
  2. By: Erich Pinzón-Fuchs (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Lawrence R. Klein (1920-2013) played a major role in the construction and in the further dissemination of econometrics from the 1940s. Considered as one of the main developers and practitioners of macroeconometrics, Klein's influence is reflected in his application of econometric modelling " to the analysis of economic fluctuations and economic policies " for which he was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 1980. The purpose of this paper is to give an account of Klein's image of econometrics focusing on his early period as an econometrician (1944-1950), and more specifically on his period as a Cowlesman (1944-1947). Independently of how short this period might appear, it contains a set of fundamental publications and events, which were decisive for Klein's conception of econometrics, and which formed Klein's unique way of doing econometrics. At least four features are worth mentioning, which characterise this uniqueness. First, Klein was the only Cowlesman who carried on the macroeconometric programme beyond the 1940s, even if the Cowles had already abandoned it. Second, his pluralistic approach in terms of economic theory allowed him not only to use the Walrasian framework appraised by the Cowles Commission and especially by T.C. Koopmans, but also the Marxian and Keynesian frameworks, enriching the process of model specification and motivating economists of different stripes to make use of the nascent econometrics. Third, Klein differentiated himself from the rigid methodology praised at Cowles; while the latter promoted the use of highly sophisticated methods of estimation, Klein was convinced that institutional reality and economic intuition would contribute more to econometrics than the sophistication of these statistical techniques. Last but not least, Klein never gave up what he thought was the political objective of econometrics: economic planning and social reform.
    Keywords: Economic Epistemology,History of Econometrics,History of Macroeconometric Modelling,Pluralism in Econometrics,Lawrence R Klein,Cowles Commission
    Date: 2016–09–12
  3. By: Drakopoulos, Stavros A.
    Abstract: The methodological foundations of mainstream economics have been cited as one of the main reasons for its failure to account for the economic crisis of 2008. In spite of this, the status of economic methodology has not been elevated. This is due to the persistent aversion towards methodological discourse by most mainstream economists. The anti-methodology stance has a long presence as exemplified in Frank Hahn’s (1992) work. After focusing on the debate originating after the publication of Hahn’s arguments, the paper offers a categorization of the main explanations for mainstream methodological aversion. Subsequently, it suggests an explanation based on the role of the physics scientific ideal, arguing that the endeavor to achieve the high scientific status of physics by following the methods of physics, contributed to the negative mainstream attitude towards economic methodology. The relevant writings of the extremely influential mainstream economists Irving Fisher and Milton Friedman, reinforce the assertion that the alleged hard science status of economics renders methodological discussions and especially methodological criticism, rather pointless. The paper also calls for a more systematic discussion of this issue, especially in the wake of the line of argument that links the recent failings of mainstream economics to its methodological basis
    Keywords: Economic Methodology; History of Economic Thought; Economics and Physics; Economic Crisis
    JEL: B0 B30 B40
    Date: 2016–09
  4. By: Erich Pinzón-Fuchs (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper discusses a longstanding debate between two empirical approaches to macroeconomics: the econometrics program represented by Lawrence R. Klein, and the statistical economics program represented by Milton Friedman. I argue that the differences between these two approaches do not consist in the use of different statistical methods, economic theories or political ideas. Rather, these differences are deeply rooted in methodological principles and modeling strategies inspired by the works of Léon Walras and Alfred Marshall, which go further than the standard opposition of general vs. partial equilibrium. While Klein’s Walrasian approach necessarily considers the economy as a whole, despite the economist’s inability to observe or understand the system in all its complexity, Friedman’s Marshallian approach takes into account this inability and considers that economic models should be perceived as a way to construct systems of thought based on the observation of specific and smaller parts of the economy.
    Keywords: Lawrence R. Klein, Milton Friedman, macroeconometric modeling, Cowles Commission, National Bureau of Economic Research, empirical approaches to macroeconomics, controversy on statistical illusions, Walras-Marshall methodological divide.
    Date: 2016–09–12
  5. By: Nicolas Brisset (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: The issue of performativity concerns the claim that economics shape rather than merely describing the social world. This idea took hold following a paper by Donald MacKenzie and Yuval Millo entitled “Constructing a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange” (2003). This paper constitutes an important contribution to the history of economic thought since it provides an original way to focus on the scientific construction of the real economy. The authors discuss the empirical success of the Black-Scholes-Merton (BSM) model on the Chicago Board Options Exchange (CBOE) during the period 1973-1987. They explain this success in part as instead of discovering pre-existing price regularities, it was used by traders to anticipate options’ prices in their arbitrages. As a result, options’ prices came to correspond to the theoretical prices derived from the BSM model. In the present article I show that this is not a completely correct conclusion since the BSM model never became a self-fulfilling model. I would claim that the October 1987 stock market crash is empirical proof that the financial world never fitted with the economic theory underpinning the BSM.
    Keywords: Performativity, Black-Scholes-Merton, Self-fulfillment
    JEL: B23 B41 G12
    Date: 2016–10
  6. By: Giovanni Caggiano (Department of Economics and Management, University of Padova; and Department of Economics, Monash University); Efrem Castelnuovo (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; Department of Economics, The University of Melbourne; and Department of Economics and Management, University of Padova); Olivier Damette (UFR DEA Metz and BETA-CNRS, Université de Lorraine)
    Abstract: This paper estimates a nonlinear Threshold-VAR to investigate if a Keynesian liquidity trap due to a speculative motive was in place in the U.S. Great Depression and the recent Great Recession. We find clear evidence in favor of a breakdown of the liquidity effect after an unexpected increase in M2 in the 1921-1940 period. This evidence, which is consistent with the Keynesian view on a liquidity trap, is shown to be state contingent. In particular, it emerges only when a speculative regime identified by high realizations of the Dow Jones index is considered. A standard linear framework is shown to be ill-suited to test the hypothesis of a Keynesian liquidity trap. An investigation performed with the same data for the period 1991-2010 confirms the presence of a liquidity trap just in the speculative regime. This last result emerges significantly only when we consider the federal funds rate as the policy instrument and we model the Divisia M2 measure of liquidity.
    Keywords: Keynesian liquidity trap, threshold VAR, monetary and financial cliometrics, Great Depression, Great Recession
    JEL: B22 C52 E52 N12 N22
    Date: 2016–10
  7. By: Aurélien Goutsmedt (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Erich Pinzon-Fuchs (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Matthieu Renault (IRIF - Institut de Recherche en Informatique Fondamentale - UP7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique); Francesco Sergi (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The standard history of macroeconomics considers Lucas (1976)– “the Lucas Critique”–as a path-breaking innovation for the discipline. According to this view Lucas’s article dismissed the traditional macroeconometric practice calling for new ways of conceiving the quantitative evaluation of economic policies. The Lucas Critique is considered, nowadays, as a fundamental principle of macroeconomic modeling (Woodford, 2003). The interpretation and the application of the Critique, however, represent still unsolved issues in economics (Chari et al., 2008). Even if the influence of Lucas’s contribution cannot be neglected, something seems to be missing in the narrative: the reactions of the economists that were directly targeted by the Critique. Modeling practices of economic policy evaluation were not overthrown immediately after Lucas (1976), creating a divide between theoretical and applied macroeconomics (Brayton et al., 1997). In the first section we propose a careful account of Lucas’s argument and of some of the previous works anticipating the substantial outline of the Critique (like Frisch’s notion of autonomy). Second, we bring our own interpretation of Lucas (1976). We find two points of view in Lucas's paper: a prescriptive one that tell how to build a good macroeconometric model (it is the standard interpretation of the article); a positive one that relies on the fact that the Lucas critique could be seen as an attempt to explain a real-world phenomenon: stagflation. Third, we classify the reactions of the Keynesian macroeconometricians following this line of interpretation. On the prescriptive side, the Keynesians protested against the New Classical solution to the Lucas critique (the use of the rational expectation hypothesis among other things). Klein, for instance, proposed an alternative microfoundational program to empirically study the formation of expectations. On the positive side, the Keynesians put into question the relevance of the Lucas Critique to explain the rise of both unemployment and inflation in the 1970s. They tried to test the impact of policy regime changes and of shifts in agents' behavior. We argue that the explanation of the stagflation was elsewhere. The purpose of this paper is to study the reactions of the macroeconometricians criticized by Lucas. We focus especially on those macroeconometricians who worked on policy evaluation and who held an expertise position in governmental institutions. We categorize the different reactions to the Critique, in order to enrich the understanding of the evolution of modeling and expertise practices through the analysis of the debates–which have not yet been completely solved.
    Keywords: History of macroeconomics, Keynesian economics, Lu- cas Critique, Macroeconometrics, Rational Expectations.
    Date: 2016–09–12
  8. By: Edvinsson, Rodney (Dept. of Economic History, Stockholm University)
    Abstract: This paper argues for trans-historical reformulations of the basic economic concepts of production, work and consumption. The definition of the production boundary by System of National Accounts (SNA) is inconsistent from a scientific point of view. For example, while some non-market and illegal services are viewed as productive, others are not, and services and goods are treated differently. The definition proposed by feminist economics, the so-called third person criterion, is consistent, but in need for further development; furthermore, it is a definition of work and not of production. The purpose of this study is to investigate whether it is possible to formulate a non-eclectic set of logically consistent definitions that could be considered variations of a common underlying understanding across various theoretical traditions – mainly Classical, Neoclassical, Institutional, Marxist, Feminist and Keynesian Economics – of how humans consciously change external nature in order satisfy human needs. Important issues concern how to deal with violence, double counting of transaction costs, human capital formation, non-market activities and causation of final consumption. Production, work and consumption are defined as relations between events, the subject matter and the agent, and in the main definitions reduced to non-economic sentences. Even the utility concept is avoided. First-order logic is used, complemented with modal operators for some of the sentences. In this study, it is shown that production, work and consumption all share the common feature of intentional physical transformation of the intrinsic properties of the subject matter. The object transformed during the productive activity and work must at some point in time be external to the agent. For work, the purpose of transforming an external object must not lie in the transformation of the agent. A productive activity must potentially be able to cause the satisfaction of human needs, or final consumption, which is not a condition for work or required by the third-person criterion. Final consumption involves the transformation of the subject matter that is a final purpose for the consumer or serves as a purpose for transforming the consumer. Using a criterion applied by the institutional economist Cheung to identify transaction costs, this study defines social reproduction as an activity that would not occur in a Robinson Crusoe economy. Social reproduction occurs under an institutional setting. We can further differentiate between coercive and non-coercive social reproduction. In this study, eight different definitions of production are presented. The definition of agent external production is close to the third person criterion, but the possible causation of future final consumption is included as a condition for a productive activity. It is also related to the basic neoclassical model with its assumptions of no transaction costs. The definition of agent external non-coercive production entails that transformations of persons against their own will, whether legally or illegally performed, are unproductive activities. The definition of agent external non-social production entails that all socially reproductive activities are unproductive, and comes close to the distinction made by Classical and Marxist economists of productive and unproductive work. Humanity external production only includes the transformation of non-persons. The three definitions of time scale invariant production entails that human capital formation could be considered productive activities. Market production comes close to Keynesian theory and the present definition of SNA, with the difference that it excludes non-market goods production. The present study also opens for the possibility of unproductive work, for example failed production or professional murder, and productive final consumption that does not involve any work, for example hobby-hunting, play with children or research activity for own pleasure. Which definition of production is applied greatly affects the modelling and empirical application of growth theory and the analysis of the driving forces in economic history. For example, assume trade causes labour productivity outside of trade to increase four-fold due to specialisation, while the share of GDP in total working time increases from nil to half. With the same value added per productive hour and with total hours worked kept constant, the value added of agent external production then records a four-fold increase, while that of non-social production only a doubling. Similarly, during wars the SNA GDP often increases substantially, while the concept of agent external non-coercive production entails that all war expenses are treated as unproductive. Time frame invariant production grows faster than agent external production during expansions of the education system. Market production could serve important analytical purposes, for example to investigate the relation between money supply and inflation, but should be rid of inconsistencies such as the inclusion of non-market goods production.
    Keywords: GDP; production; work; consumption; economic philosophy; SNA
    JEL: A10 B13 B14 B40 B50 B51 B52 B54 D10 E00 E21 E23 J00 J24 N00 N01 O00
    Date: 2016–10–09
  9. By: Olivier Allain (UPD5 Droit - Université Paris Descartes - Faculté de droit - UPD5 - Université Paris Descartes - Paris 5, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Post-Keynesian economists have quite recently begun to draw attention to the consumer debt. However, as they omit the principal payment, they implicitly assimilate this debt as perpetual loans. The goal of this article is mainly methodological. We first develop a ‘Keynesian’ overlapping generations framework assuming that people borrow when they are young and service their debt (interests and principal) in the following periods. Defaults on the principal are also taken into account. We then analyze the theoretical properties of the equilibriums (multiplier effect, stability conditions) resulting from the introduction of this framework in three types of models that differ in regard of who are the debtors and who are the creditors: workers can borrow from capitalists (essay 1) or from their peer (essay 2); capitalists can borrow from their peer (essay 3).
    Keywords: consumer debt,Keynesian models,equilibrium instability,overlapping generations models
    Date: 2014–12
  10. By: Ocampo, José Antonio.; Gómez-Arteaga, Natalie.
    Keywords: social protection, social security, poverty alleviation, equal rights, economic development, Latin America
    Date: 2016

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