Anthony Thirlwall’s new book Essays on Keynesian and Kaldorian Economics is out. It has a nice chapter (chapter 11) originally written by Thirlwall himself from 1991 titled Kaldor’s Vision Of The Growth And Development Process. The description from introduction (pdf from Palgrave’s website) is a good summary:

Essay 11 outlines Kaldor’s vision of the growth and development process – a topic that concerned him for most of his academic life after the Second World War. The Essay covers his growth laws; his export-led growth model incorporating the notion of ‘circular and cumulative causation’, and his two-sector model of the interrelationship between the agricultural (primary product) and industrial sectors of the world economy. Central to Kaldor’s vision was the distinction to be made between increasing returns activities on the one hand (manufacturing industry) and diminishing returns activities on the other (land-based activities such as agriculture and mining). This distinction lies at the heart of his three growth laws that (i) manufacturing is the engine of growth because of (ii) static and dynamic returns to scale in industry (also known as Verdoorn’s law), and (iii) increases in productivity outside of manufacturing as resources are drawn from diminishing returns activities. The question, of course, is what determines industrial growth in the first place. Kaldor’s answer was that it is the prosperity and growth of the agricultural sector in the early stages of development, and then export growth in the later stages. In an open economy, exports are the only true [exogenous] component of aggregate demand. Consumption and investment are largely endogenous.

This view of the role of exports is the basis of his ‘regional’ export-led growth model with cumulative features which has four structural equations: (i) output growth as a function of export growth; (ii) export growth as a function of changing competitiveness and income growth outside the region; (iii) competitiveness as a function of productivity growth, and (iv) productivity growth as a function of output growth (Verdoorn’s Law). Depending on the parameters of the model, regional growth rates may diverge or converge (see Essay 12). It is also possible to introduce a balance of payments constraint into the model which, if relative prices (or real exchange rates) don’t change in the long run, leads to the result that growth will approximate to the rate of growth of exports relative to the income elasticity of demand for imports, which is the dynamic analogue of the static Harrod foreign trade multiplier, which Kaldor argued was a more important multiplier than the Keynesian closed economy multiplier for understanding the pace and rhythm of growth in open economies.

In a closed economy, however, growth by definition cannot be determined by exports. The world as a whole is a closed economy, and Kaldor lectured in Cambridge for many years on a two-sector model of world growth in which the growth of the industrial sector of the world economy is fundamentally determined by the rate of land-saving innovations in agriculture as an offset to diminishing returns in that sector. The model shows that if growth is to be maximised, there must be an equilibrium terms of trade between the two sectors, otherwise growth will be demand constrained if agricultural prices are ‘too low’, or supply constrained if agricultural prices are ‘too high’. Kaldor himself never brought the model to fruition in published form, but attempts have been made to formalise it by Targetti (1985) and myself (see Essay 13).

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John Nash died on Saturday in New Jersey.

Via the blog Econospeak, I came across a 2005 talk titled Ideal Money and Asymptotically Ideal Money by John Nash about money and macroeconomics. pdf here and a news report here. Nash starts his lecture straightaway by dismissing Keynesian economics:

The special commodity or medium that we call money has a long and interesting history. And since we are so dependent on our use of it and so much controlled and motivated by the wish to have more of it or not to lose what we have we may become irrational in thinking about it and fail to be able to reason about it like about a technology, such as radio, to be used more or less efficiently.

So I wish to present the argument that various interests and groups, notably including “Keynesian” economists, have sold to the public a “quasi-doctrine” which teaches, in effect, that “less is more” or that (in other words) “bad money is better than good money”. Here we can remember the classic ancient economics saying called “Gresham’s law” which was “The bad money drives out the good”. The saying of Gresham’s is mostly of interest here because it illustrates the “old” or “classical” concept of “bad money” and this can be contrasted with more recent attitudes which have been very much influenced by the Keynesians and by the results of their influence on government policies since the 30s.

This is beyond belief. My post will not defend Keynesianism here because it requires a separate defense and there is a lot of literature on it. My only purpose is to quote how wrong a renowned economist can be on matters of money and macroeconomics. Further in the essay, there’s also a defense of a common currency for various nations, such as the Euro (without any political union) and a proposal for other nations:

In the near future there may be a smaller number of major currencies used in the world and these may stand in competitive relations among themselves. There is now the “euro” and the old inflationary history of the Italian lira is past history now. And there COULD be introduced, for example, a similar international currency for the Islamic world or for South Asia, or for South America, or here or there.

All this is just the orthodox belief that governments are incompetent to have any influence on output, employment and so on or that any attempt is just counterproductive. We all know what has become of the Euro Area and many (Post-)Keynesians predicted the problem of forming a currency union without a political union. It sometimes surprises me that even brilliant minds are unable to accept the notion that governments around the world drive their economies via fiscal and monetary policies. Some concede that governments can and should get their economies out of depression if it happens but then assume that outside of recessions or depressions, fiscal policy becomes unimportant and only monetary policy has some role to play. The recent crisis has changed opinions of many but there is still a long way to go.

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Krugman And Causality

17 May 2015

In a recent post titled Money, Inflation And Models for his NYT blog, Paul Krugman clearly states that “normal equilibrium macro models” say that the direction of causality is from money to prices. Krugman says: Consider the relationship between the monetary base — bank reserves plus currency in circulation — and the price level. Normal equilibrium macro models say […]

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Fiscal Conservatism, Weak International Trade Performance And Income Inequality Not Good For The U.S. Economy

15 May 2015

The US economy is only 8.8 percent above the pre-crisis peak. The Levy Institute has a new Strategic Analysis publication titled Fiscal Austerity, Dollar Appreciation, And Maldistribution Will Derail The US Economy in which they identity three main structural characteristics of the economy of the United States that stand in the way of the recovery: (1) […]

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More Jobs, Flat Wages: Trade And The Trade Deficit Continue To Hurt Us

12 May 2015

by Thomas Palley April’s Employment Report showed a gain of 223,000 jobs and a further one-tenth percent decline in the unemployment rate to 5.4 percent. The good news is the report shows the economy continues to nudge forward and create jobs for newcomers into the labor force. The bad news is the economy is not growing […]

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Free Trade? Heterodox Dissent

25 April 2015

One of the most important message of this blog is that “free trade” is quite devastating to economies. In a recent article Economists Actually Agree on This: The Wisdom of Free Trade for The New York Times, Greg Mankiw once again pushes for free trade and also mentions that there is consensus in the profession. Many of […]

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The Illogical Golden Rule

12 April 2015

There’s a nice article by Wynne Godley written in 2005 for The Guardian on the fiscal policy golden rule. There are two things wrong about the golden rule. The first is to think that capital expenditure is somehow superior to current expenditure. This is the reason one frequently hears “wonks” stressing on government infrastructure spending. The other is […]

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Interest Rate, Growth And Debt Sustainability

7 April 2015

Frequently, discussions about debt sustainability have discussions about the importance of the interest rate and growth in debt sustainability analysis. See for example, today’s Paul Krugman’s post on his blog. It is concluded that as long as the rate of interest is below the rate of growth, the ratio public debt/gdp doesn’t explode. Unfortunately, this […]

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Severin Reissl’s Critique Of Steve Keen’s Black Box Economics

3 April 2015

Economics is a strange subject. A lot of times we learn a lot from others’ errors and even if you see the errors, there’s sometimes a lot to learn from others’ critiques of the same because sometimes it is difficult to see all the pitfalls even if one sees a few. Severin Reissl from the University […]

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The U.S. Net International Investment Position At The End Of 2014 [Updated]

1 April 2015

The U.S. Department of Commerce’s Bureau of Economic Analysis today released accounts for the United States’ international investment position. The U.S. is sometimes called the world’s biggest debtor and its net international investment position is now (at the end of 2014) minus $6.9 trillion. Here’s the chart from the BEA’s website. A few points. The importance of […]

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