nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2020‒04‒13
nine papers chosen by
Karl Petrick
Western New England University

  1. "Stabilizing State and Local Budgets through the Pandemic and Beyond" By Alexander Williams
  2. The Paradox of Thrift in the Two-Sector Kaleckian Growth Model By Fanti, Lucrezia; Zamparelli, Luca
  3. Post-Keynesian Economics - Challenging the Neo-Classical Mainstream By Heise, Arne
  4. The Welfare State and Liberal Democracy - A Political Economy Approach By Heise, Arne; Serfraz Khan, Ayesha
  5. Responding to Economic and Ecological Deficits By Jonathan M. Harris
  6. "A Simple Model of the Long-Term Interest Rate" By Tanweer Akram
  7. Is the most unproductive firm the foundation of the most efficient economy? Penrosian learning confronts the Neoclassical fallacy By William, Lazonick
  8. Do Trade and Investment (Agreements) Foster Development or Inequality? By Pierre Kohler; Francis Cripps
  9. Fight the Pandemic, Save the Economy: Lessons from the 1918 Flu By Sergio Correia; Stephan Luck; Emil Verner

  1. By: Alexander Williams
    Abstract: The federal government appears to have abandoned the idea of a coordinated public health response to the COVID-19 pandemic, leaving the entirety to state and local governments. Meanwhile, the economic standstill resulting from necessary public health measures will soon cripple state and local budgets. Alexander Williams outlines a proposal for an intragovernmental automatic stabilizer program that would provide a backstop for state and local finances—both during the pandemic and beyond. Without this program, states will be severely constrained in their ability to respond to COVID-19, and balanced budget requirements will force them to cut jobs and raise taxes during the deepest recession in living memory.
    Date: 2020–03
  2. By: Fanti, Lucrezia; Zamparelli, Luca
    Abstract: We analyze the paradox of thrift in the two-sector Kaleckian growth model. We consider an economy with one consumption and one investment good, and differential sectoral mark-ups. We show that when the investment function depends on aggregate capacity utilization and on the aggregate profit share (the Bhaduri-Marglin investment function) the paradox of thrift in its growth version may fail if mark-ups are higher in the investment good sector. In this case, the reduction in the saving rate produces a reallocation of economic activity towards the investment good sector; the aggregate profit share rises and its positive effect on investment may offset the reduction in average capacity utilization if investment is relatively more sensitive to profitability than to the level of activity.
    Keywords: two-sector growth model, paradox of thrift, Bhaduri-Marglin investment function
    JEL: D33 E11
    Date: 2020–03–21
  3. By: Heise, Arne
    Abstract: This article takes an in-depth look at post-Keynesianism as a paradigmatic al-ternative to the dominant neoclassical mainstream. It quickly becomes clear that post-Keynesianism is not a unified school of thought, but rather an assortment of theoretical approaches that share certain methodological and epistemological similarities and characteristic postulates. The Article does not attempt to de-scribe the full array of Kaleckian, Kaldorian and Sraffian variants of post-Keynesian theory but instead analysis the paradigmatic and formal structure of one particular form of post-Keynesianism, the monetary theory of production in order to reconstruct these characteristic postulates from the axiomatic core of post-Keynesianism. It then sets out the theory of market participation, an alter-native theory of economic policy that builds on monetary production economics.
    Keywords: post-Keynesianism, heterodox economics, neoclassical economics, paradigms
    JEL: B41 B50 B59 E11 E12 E60
    Date: 2019
  4. By: Heise, Arne; Serfraz Khan, Ayesha
    Abstract: This paper attempts to shed some light on the developments of welfare states in highly developed nations since World War Two (WW2) within the context of a narrative which seeks to combine institutional distinctions, termed “varieties of capitalism,” with the historical regimes of regulation theory in a political economy perspective which puts interested political actors at centre stage. It will be argued that in a liberal democracy, the elite has the framing and agenda-setting power to “manufacture a political will” according to its interests. The welfare state is not the result of a long social struggle on the part of the needy; rather, it results in its general features from the minimal state of meritocratic exigencies. Under the very peculiar circumstances of the post-WW2 era, this even translated into a rise in social welfare spending to more than a third of national income. The particular design of welfare state organisation was the subject-matter of political conflict, and a clear distinction between liberal and coordinated market economies can be attributed to cultural differences and institutional settings. Yet the core of the welfare state conception serves the interest of the meritocracy as much as those who benefit from social programmes and re-distribution. And the neoliberal attack on the welfare state since the 1980s is not a necessary re-calibration due to changing economic conditions or a growing lack of solidarity among the people but an expression of a modified cost-benefit analysis from the elite’s perspective.
    Keywords: welfare state; Keynesian national welfare state; Schumpeterian competition state; elite; agenda theory
    JEL: B50 H10 H55 I30
    Date: 2019
  5. By: Jonathan M. Harris
    Abstract: Macroeconomic theory was shaken up in the wake of the financial crisis, with neoclassical approaches proving inadequate to analyze or respond to the need for policy action. Despite efforts to return to more conventional macro perspectives, a continuing re-evaluation of economic theory has important implications both for traditional economic concerns such as employment and inflation, and for ecological issues and the climate crisis. An emerging “green Keynesian†approach combines a radical Keynesian analysis with ecological priorities such as drastic carbon emissions reduction. One important aspect of this reorientation of theory is the analysis of economic and ecological deficits. In the years since the financial crisis, both economic and ecological deficits have increased. This poses a challenge for “green Keynesian†policy. It is therefore necessary to have effective analyses to measure and respond to ecological deficits, as well as policy measures to deal with economic deficits. This paper proposes a new approach to measuring ecological deficits, and a new perspective on economic deficits and debt. Since there is no single unitary measure for depletion or degradation of different kinds of resources, it is necessary to measure different kinds of deficit for different resources, with a goal of reducing all of these to zero or replacing them with surpluses. The analysis involves exploring the specific economic implications of reducing both ecological and economic deficits, which involves re-conceptualizing economic growth and "degrowth", and provides an alternative to current U.S. policies under the Trump administration, which are contributing to widening both deficits.
    Date: 2019–04
  6. By: Tanweer Akram
    Abstract: This paper presents a simple model of the long-term interest rate. The model represents John Maynard Keynes’s conjecture that the central bank’s actions influence the long-term interest rate primarily through the short-term interest rate, while allowing for other important factors. It relies on the geometric Brownian motion to formally model Keynes’s conjecture. Geometric Brownian motion has been widely used in modeling interest rate dynamics in quantitative finance. However, it has not been used to represent Keynes’s conjecture. Empirical studies in support of the Keynesian perspective and the stylized facts on the dynamics of the long-term interest rate on government bonds suggest that interest rate models based on Keynes’s conjecture can be advantageous.
    Keywords: Long-Term Interest Rate; Bond Yields; Monetary Policy; Short-Term Interest Rate; John Maynard Keynes
    JEL: E12 E43 E50 E58 E60 G10 G12
  7. By: William, Lazonick
    Abstract: Edith Penrose’s 1959 book The Theory of the Growth of the Firm [TGF] provides intellectual foundations for a theory of innovative enterprise, which is essential to any attempt to explain productivity growth, employment opportunity, and income distribution. Properly understood, Penrose’s theory of the firm is also an antidote to the deception that is foundational to neoclassical economics: The theory, taught by PhD economists to millions upon millions of college students for over seven decades, that the most unproductive firm is the foundation of the most efficient economy. The dissemination of this “neoclassical fallacy” to a mass audience of college students began with Paul A. Samuelson’s textbook, Economics: An Introductory Analysis, first published in 1948. Over the decades, the neoclassical fallacy has persisted through 18 revisions of Samuelson, Economics and in its countless “economics principles” clones. This essay challenges the intellectual hegemony of neoclassical economics by exposing the illogic of its foundational assumptions about how a modern economy functions and performs. The neoclassical fallacy gained popularity in the 1950s, during which decade Samuelson revised Economics three times. Meanwhile, Penrose derived the logic of organizational learning that she lays out in TGF from the facts of firm growth, absorbing what was known in the 1950s about the large corporations that had come to dominate the U.S. economy. Also, during that decade, the knowledge base on the growth of firms on which economists could subsequently draw was undergoing an intellectual revolution, led by the business historian, Alfred D. Chandler, Jr. He was engaged in the first stage of a career that would span more than a half century, during which Chandler documented and analyzed the centrality to U.S economic development of what he would come to call “the managerial revolution in American business.” In combination, the works of Penrose and Chandler form intellectual foundations for my own work on the Theory of Innovative Enterprise—an endeavor that has enabled me, as an economist, to recognize not only the profound importance of organizational learning for economic theory but also the illogic of the neoclassical theory of the firm for our understanding of the central institution of a modern economy, the business corporation. In this essay, I argue that the key characteristic of the innovative enterprise is fixed-cost investment in the productive capabilities of the company’s employees to engage in organizational learning. The purpose of this investment in organizational learning is to develop a higher-quality product than was previously available. When successful, the development of the higher-quality product enables the firm to capture a large extent of the market, transforming high fixed cost into low unit cost. The result is sustainable competitive advantage that enables the growth of the firm, contributing to the growth of the economy as a whole. I argue that to get beyond the neoclassical fallacy, economists have to stop relying on constrained-optimization methodology. Rather, they need to be trained in a “historical transformation” methodology that integrates history and theory. It is a methodology in which theory serves as both a distillation of what we have learned from the study of history and a guide to what we need to learn about reality as the “present as history” unfolds.
    Keywords: Theory of the firm, Penrosian learning, Chandlerian history, innovative enterprise, economic performance, Paul Samuelson, neoclassical fallacy, constrained optimization, historical transformation
    JEL: A2 B3 N8
    Date: 2020–01
  8. By: Pierre Kohler; Francis Cripps
    Abstract: This paper proposes to revisit the debate on trade and investment agreements (TIAs), development and inequality, looking at the role of Global Value Chains (GVCs) and transnational corporations (TNCs). It first presents stylized facts about trade and investment (agreements), declining global economic growth and rising inequality under the latest round of globalization. It then provides a long-run perspective on the mixed blessings of external opening, summarizing some key contributions of the mainstream literature, which are converging with long-standing research findings of more heterodox economists, and the eroding consensus today. Based on this stock-taking, it takes a fresh critical look at the TIAs-GVCs-TNCs nexus and their impact. Using data on value-added in trade and new firm-level data from the consolidated financial statements of the top 2000 TNCs going back to 1995, it examines whether the fragmentation of production along GVCs led to positive structural change or rather stimulated unsustainable trends in extractive and FIRE sectors. It then turns to the role of TNC-driven GVCs as a vehicle for economic concentration. Finally, it presents evidence linking TIAs and their correlates to rising inequality. Key findings include the fact that the ratio of top 2000 TNCs profits over revenues increased by 58 percent between 1995 and 2015. Moreover, the rise in top 2000 TNCs profits accounts for 69 percent of the 2.5 percentage points decline in the global labour income share between 1995 and 2015, with the correlation coefficient between annual changes in both variables as high as 0.82. The paper concludes by calling for a less ideological policy debate on TIAs, which acknowledges the mixed blessings of external financial and trade opening, especially their negative distributional impact and destabilizing macro-financial feedback effects, which both call for policy intervention. As an alternative to short-sighted protectionism, it further discusses possible options for anticipating undesirable effects arising from TIAs (e.g. rising carbon emissions, economic instability, inequality, etc.) and addressing those in TIAs themselves.
    Date: 2018–10
  9. By: Sergio Correia; Stephan Luck; Emil Verner
    Abstract: The COVID-19 outbreak has sparked urgent questions about the impact of pandemics, and associated countermeasures, on the real economy. Policymakers are in uncharted territory, with little guidance on what the expected economic fallout will be and how the crisis should be managed. In this blog post, we use insights from a recent research paper to discuss two sets of questions. First, what are the real economic effects of a pandemic—and are these effects temporary or persistent? Second, how does the local public health response affect the economic severity of the pandemic? In particular, do non-pharmaceutical interventions (NPIs) such as social distancing have economic costs, or do policies that slow the spread of the pandemic also reduce its economic severity?
    Keywords: non-pharmaceutical interventions; real effects; Pandemic
    JEL: N32 E0 N12 E32
    Date: 2020–03–27

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