Monthly Archives: July 2014

Thomas Palley — New Keynesianism As A Club

Thomas Palley has a new blog post detailing how much recent new Keynesian theory is a rediscovery of ideas developed by old Keynesians and Post Keynesians over the past thirty years and that new Keynesians persistently fail to acknowledge that precedence.

New Keynesianism as a Club

Club, noun. 1. An association or organization dedicated to a particular interest or activity. 2.  A heavy stick with a thick end, especially one used as a weapon.

Paul Krugman’s economic analysis is always stimulating and insightful, but there is one issue on which I think he persistently falls short. That issue is his account of New Keynesianism’s theoretical originality and intellectual impact.

Read more here.

ROKE Issue On Steve Keen’s Notion Of Aggregate Demand

The new issue of ROKE (Review of Keynesian Economics) is online with a few articles available free for some time. Marc Lavoie, Thomas Palley and Brett Fiebiger comment on Keen’s notion of aggregate demand.

Marc Lavoie’s article A comment on ‘Endogenous money and effective demand’: a revolution or a step backwards? is available here.

Steve Keen’s own paper Endogenous money and effective demand is available here.

From Marc Lavoie’s introduction and the ending:

Steve Keen argues that post-Keynesians have not sufficiently emphasized the revolutionary character of endogenous money for macroeconomic theory, and that this should be done by recognizing that aggregate demand is equal to current or past income plus the change in debt. This equation, attributed in particular to Hyman Minsky, is discussed and questioned, and it is recalled that a similar equation had been proposed by Alfred Eichner. The consequences of bank credit for firms or households are further analysed within the context of the national accounts, and it is shown that one does not need a redefinition of aggregate demand and aggregate supply, in contrast to what is proposed by Keen…

All post-Keynesians certainly concur with the idea that banks have the capacity to alter the level of aggregate demand, and hence that it would be desirable for banks, debt, and money to be included in models of macroeconomics… There are several examples of post-Keynesian macroeconomic models that incorporate banks, debt, and money – for instance, Godley and Cripps (1983) and Godley and Lavoie (2007), just to mention those that I am most familiar with… But this does not imply, as Keen claims, that we need a redefinition of aggregate demand such that the starting point of macroeconomics is that ‘effective demand is equal to income plus the turnover of new debt’ (Keen 2014a, p. 286). Nor does it mean that aggregate supply needs to be redefined ‘to incorporate the financial markets’ (ibid., p. 290). To provide new definitions of existing terms will only lead to a maze of confusions.

Keen makes the grandiose claim that his approach leads to a ‘new, monetary macroeconomics’ (Keen 2014a, p. 286). While statements of this kind may appeal to an internet audience, I doubt they will convince readers of this journal.

Marc also quotes my blog post Income ≠ Expenditure? which critiqued Keen. (Thanks!).

Tom Palley and Brett Fiebiger’s papers are not available for download by the journal. I will update the post in case ROKE decides to make it available. The permanent links are available in the left column of the papers linked in the post. Palley’s draft version is available here

Also don’t miss the paper by Anthony Thirlwall in the current issue.

Thomas Palley On The Phillips Curve

Tom Palley has written a short note titled The Phillips Curve: Missing the Obvious and Looking in All the Wrong Places. 

From the introduction:

The Phillips Curve: Missing the Obvious and Looking in All the Wrong Places

There is an old story about a policeman who sees a drunk looking for something under a streetlight and asks what he is looking for. The drunk replies he has lost his car keys and the policeman joins in the search. A few minutes later the policeman asks if he is sure he lost them here and the drunk replies “No, I lost them in the park.” The policeman then asks “So why are you looking here?” to which the drunk replies “Because this is where the light is.”That story has much relevance for the economics profession’s approach to the Phillips curve.

Read more here

Thomas Palley On Milton Friedman’s Shadow

Thomas Palley has a new paper critiquing Milton Friedman’s influence on Economics:

Milton Friedman’s economics and political economy:
an old Keynesian critique

Milton Friedman’s influence on the economics profession has been enormous. In part, his success was due to political forces that have made neoliberalism the dominant global ideology, but Friedman also rode those forces and contributed to them. Friedman’s professional triumph is testament to the weak intellectual foundations of the economics profession which accepted ideas that are conceptually and empirically flawed. His success has taken economics back in a pre-Keynesian direction and squeezed Keynesianism out of the academy. Friedman’s thinking also frames so-called new Keynesian economics which is simply new classical macroeconomics with the addition of imperfect competition and nominal rigidities. By enabling the claim that macroeconomics is fully characterized by a divide between new Keynesian and new classical macroeconomics, new Keynesianism closes the pincer that excludes old Keynesianism. As long as that pincer holds, economics will remain under Friedman’s shadow.

Access the full paper from Palley’s blog here.