nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2022‒03‒14
eight papers chosen by
Karl Petrick
Western New England University

  1. Aggregate Demand Externalities, Income Distribution, and Wealth Inequality By Luke Petach; Daniele Tavani
  2. The network origins of aggregate Fluctuations: A demand-side approach By Emanuele Citera; Shyam Gouri Suresh; Mark Setterfield
  3. Structural change in the US Phillips curve, 1948-2021: the role of power and institutions By Mark Setterfield; Robert A. Blecker
  4. Theorizing varieties of capitalism: economics and the fallacy that "There is no alternative (TINA)" By Thomas I. Palley
  5. Classical political economy and secular stagnation By Manuel Cruz Luzuriaga; Daniele Tavani
  6. Pandemics and Aggregate Demand: a Framework for Policy Analysis By Peter Flaschel; Giorgos Galanis; Daniele Tavani; Roberto Veneziani
  7. A Personal View from the Wrong Side of the Subsequent Fifty Years By David Laidler
  8. Conceptualizing a circular economy in the Caribbean: perspectives and possibilities. Policy Brief By -

  1. By: Luke Petach (Jack Massey College of Business, Belmont University); Daniele Tavani (Department of Economics, Colorado State University)
    Abstract: We study a two-class model of growth and the distribution of income and wealth at the intersection of contemporary work in classical political economy and the post-Keynesian tradition. The key insight is that aggregate demand is an externality for individual firms: this generates a strategic complementarity in production that results in equilibrium underutilization of the economy’s productive capacity and hysteresis in real GDP per-capita in balanced growth. This equilibrium inefficiency reverberates into both the functional distribution of income and the distribution of wealth: both the wage share and the workers’ wealth share would be higher at full capacity. Consequently, fiscal allocation policy that achieves productive efficiency also attains a higher labor share and a more equitable distribution of wealth. Demand shocks also have permanent level effects. Extensions look at temporary growth and employment effects of fiscal policy with dynamic increasing returns, and employment hysteresis. These findings are useful as an organizing framework for thinking through the lackluster economic record of the so-called Neoliberal era, the sluggish recovery of most advanced economies following the Great Recession, and what to expect regarding the recovery from the Covid-19 shock.
    Keywords: Externalities, Capacity Utilization, Factor Shares, Wealth Inequality
    JEL: D25 D31 D33 D62 E12
    Date: 2021
  2. By: Emanuele Citera (New School for Social Research); Shyam Gouri Suresh (Davidson College); Mark Setterfield (New School for Social Research)
    Abstract: We construct a model of cyclical growth with agent-based features designed to study the network origins of aggregate fluctuations from a demand-side perspective. In our model, aggregate fluctuations result from variations in investment behavior at firm level motivated by endogenously-generated changes in `animal spirits' or the state of long run expectations(SOLE). In addition to being influenced by their own economic conditions, firms pay attention to the performance of first-degree network neighbours, weighted (to differing degrees) by the centrality of these neighbours in the network, when revising their SOLE. This allows us to analyze the effects of the centrality of linked network neighbours on the amplitude of aggregate fluctuations. We show that the amplitude of fluctuations is significantly affected by the eigenvector centrality, and the weight attached to the eigenvector centrality, of linked network neighbours. The dispersion of this effect about its mean is shown to be similarly important, resulting in the possibility that network properties can result in `great moderations' giving way to sudden increases in the volatility of aggregate economic performance.
    Keywords: Aggregate fluctuations, cyclical growth, animal spirits, state of long run expectations, agent-based model, random network, preferential attachment, small world.
    JEL: C63 E12 E32 E37 O41
    Date: 2021
  3. By: Mark Setterfield (The New School for Social Research); Robert A. Blecker (American University)
    Abstract: This paper provides an institutional-analytical account of changes in the structure of the US Phillips curve (PC) during the post-war period. It does so by restoring conflict and power to the forefront of macro theory and, in particular, the wage- and price-setting behaviour of workers and firms. The resulting account is consistent with the main stylized facts that characterize the evolution of the US PC since 1948: the disappearance and subsequent reappearance of a 'standard' PC (relating the level of the inflation rate, not the change in this rate, to the rate of unemployment); and the flattening of the PC since the 1990s.
    Keywords: Philips Curve, inflation, unemployment, natural rate hypothesis, bargaining power, institutions
    JEL: E12 E24 E25 E31 N12
    Date: 2022
  4. By: Thomas I. Palley
    Abstract: The VoCs approach to capitalism has the potential to transform economics. It tacitly emphasizes the plasticity of economies, whereby their character and outcomes are significantly a matter of choice. This paper augments VoCs theory to include a distinction between varieties and varietals of capitalism. Drawing on biology, varieties correspond to species and varietals correspond to sub-species. The paper proposes an analytical framework that unifies VoCs theory. It adds a mesoeconomics that links macroeconomics and microeconomics. That mesoeconomics concerns the institutions, behavioral norms, rules and regulations, and policies that characterize the economy and influence its performance. The mesoeconomic structure is described using the metaphor of a box, the six sides of which correspond to the major dimensions of capitalist economies. The design of the box is the product of societal and political choices, which places politics at the center of VoCs analysis. Policy space and policy lock-in are important concerns as they impact the choice set. The fact that economies inevitably involve choice means there is an inescapable normative question regarding what type of capitalism society will have.
    Keywords: Varieties of capitalism, varietals of capitalism, mesoeconomics, globalization, policy space, policy lock-in
    JEL: P0 P1 D2
    Date: 2022
  5. By: Manuel Cruz Luzuriaga (Colorado State University); Daniele Tavani (Colorado State University)
    Abstract: This paper presents a model of secular stagnation, income and wealth distribution, and employment in the Classical Political Economy tradition, that can be contrasted with the accounts by Piketty (2014) and Gordon (2015). In these explanations, an exogenous reduction in the growth rate g --because of declining fertility or the exhaustion of path-breaking scientific discoveries--increases the difference with the rate of return to capital r. The capital-income ratio rises, and if the elasticity of substitution is above one, the wage share falls. Both Piketty and Gordon assume full employment at all times. In our explanation, which does not presuppose full employment, the key tension is between profit-driven capital accumulation and wage-driven labor-augmenting technical change: both are defining for Classical Political Economy, and have been emphasized in recent heterodox macro literature. Labor-crushing institutional or technological shocks initially foster capital accumulation -which is profit-driven-- and increase wealth inequality. However, the effect on long-run growth is negative, because of the reduced incentives by firms to introduce labor-saving innovation, which is wage-driven. The capital/income ratio must rise in order to restore balanced growth in the long run; and the increase in wealth inequality is permanent. The ultimate effect on long-run employment depends on the strength of the response of labor-augmenting technical change vs. the response of real wage growth to labor market institutions: accordingly, long-run employment can either be wage-led or profit-led. We then test the model using time-series data for the US (1990-2019): the test offers support to the main predictions of our model, and to the employment-population ratio being wage-led.
    Keywords: Secular Stagnation, Factor Shares, Wealth Inequality, Employment
    JEL: D31 D33 E11 E24 E25
    Date: 2021
  6. By: Peter Flaschel (Department of Economics, Bielefeld University); Giorgos Galanis (Institute of Management Studies, Goldsmiths University of London); Daniele Tavani (Department of Economics, Colorado State University); Roberto Veneziani (School of Economics and Finance, Queen Mary University of London)
    Abstract: This paper studies the interaction between epidemiological dynamics and the dynamics of economic activity in a demand-driven model in the structuralist/post-Keynesian tradition. On the one hand, rising aggregate demand increases the contact rate and therefore the probability of exposure to a virus. On the other hand, rising infection lowers aggregate demand because of reduced household spending. The resulting framework is well-suited for policy analysis through numerical exercises. We show that, first, laissez-faire gives rise to sharp fluctuations in demand and infections before herd immunity is achieved. Second, absent any restrictions on economic activity, physical distancing measures have rather limited mitigating effects. Third, lockdowns are effective, especially at reducing death rates while buying time before a vaccine is available, at the cost of a slightly more pronounced downturn in economic activity compared with alternative policies. This casts some doubt on the so-called “lives versus livelihood†policy trade-off. However, we also highlight the importance of policies aimed at mitigating the effects of the epidemic on workers’ income.
    Keywords: pandemic, aggregate demand, distribution, public policy
    JEL: I1 E6 E25 E12 H0
    Date: 2021
  7. By: David Laidler (University of Western Ontario)
    Abstract: Lucas (1972) was a paper that permanently changed the course of macroeconomics, even though its “money supply surprise†model lost its central place in the area within a decade because of empirical difficulties. However, Lucas’s novel methodology, based on clearing markets and rational expectations, still dominates orthodox macroeconomic theorising. An unfortunate side effect of this has been that, because mainstream models have no analytic room for money to play a key role in economic activity, the theoretical case for taking that role seriously was undermined just at the time when traditional monetarist macro-models were facing empirical problems. The consequences of all this for today’s monetary policy environment are briefly discussed.
    Keywords: Lucas; neutral money, monetarism, Keynesianism; micro-foundations; clearing-markets; inflation; recession
    JEL: E13 E31 E40 E52 N01
    Date: 2021
  8. By: -
    Abstract: Although the notion of a circular economy (CE) has been conceived and debated for more than half a century (Henrysson and Nuur, 2021), it has gained considerable popularity in the lexicon of economists, ecologists and other development thinkers over the past two decades. The increasing evidence of the existential threat of human-induced climate change and the related imperatives of decarbonizing the global economy, have led to greater focus on strategies for a more sustainable use of the natural and environmental resource base.
    Date: 2021–12–09

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