Tag Archives: marc lavoie

“In The Long Run”

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again.

–  John Maynard Keynes, A Tract on Monetary Reform (1923), Ch. 3, p. 80.

As you might know, the Indian government cancelled the legal tender nature of majority of bank notes in circulation, earlier this month and asked Indians to deposit them at banks or exchange them for new. The aim according to the government was to curb counterfeiting and what’s called black money here. This is damaging as a large amount of transaction is in bank notes and the implementation has been a failure. People have been standing in queues for the whole day and some even reach banks at 2 am to get a good position in the queue. For many, standing in queues means that the day’s labour is lost. For others, there are delays in wage payments since their employers have problems getting hold of new bank notes. More than 50 people have died. Even 11 bank managers have died due to stress and work overload.

Despite this we keep hearing from the government and the ruling political party’s defenders that the benefits will be long term.

The previous Indian Prime Minister (who was the nation’s leader during mid 2004-mid 2014), Manmohan Singh gave a scathing speech in the Indian Parliament yesterday in which he quotes Keynes on the long run. Manmohan Singh was a student at Cambridge and his heroes are Nicholas Kaldor and Joan Robinson and presumably John Maynard Keynes as well. In this era where politicians are promoting neoliberal ideas, it’s good to see the master being quoted in a Parliament.

The seven-minute video is linked below.


click the picture to see the video on YouTube. 

This question about the long-term reminds me of super-hysteresis which was referred by Marc Lavoie recently in an article for INET. It’s closely related to the Kaldor-Verdoorn law in which demand affects supply.  The damage done to the demand side because of slowdown in production caused by the Indian government’s poor implementation of its decision to replace majority of bank notes by value affects the supply side as well. Almost nobody who talks about the long-term benefits talks about this issue.

Remarkable Admission On Fiscal Policy

There’s a paper by Jason Furman who is the Chairman of the Council of Economic Advisers which concedes how wrong economists were on fiscal policy. The link is a file hosted at the White House’s website! The paper starts off with a remarkable admission on fiscal policy (h/t and words borrowed from Jo Michell)

A decade ago, the prevalent view about fiscal policy among academic economists could be summarized in four admittedly stylized principles:

  1. Discretionary fiscal policy is dominated by monetary policy as a stabilization tool because of lags in the application, impact, and removal of discretionary fiscal stimulus.
  2. Even if policymakers get the timing right, discretionary fiscal stimulus would be somewhere between completely ineffective (the Ricardian view) or somewhat ineffective with bad side effects (higher interest rates and crowding-out of private investment).
  3. Moreover, fiscal stabilization needs to be undertaken with trepidation, if at all, because the biggest fiscal policy priority should be the long-run fiscal balance.
  4. Policymakers foolish enough to ignore (1) through (3) should at least make sure that any fiscal stimulus is very short-run, including pulling demand forward, to support the economy before monetary policy stimulus fully kicks in while minimizing harmful side effects and long-run fiscal harm.

Today, the tide of expert opinion is shifting the other way from this “Old View,” to almost the opposite view on all four points. This shift is partly the result of the prolonged aftermath of the global financial crisis and the increased realization that equilibrium interest rates have been declining for decades. It is also partly due to a better understanding of economic policy from the experience of the last eight years, including new empirical research on the impact of fiscal policy as well as observations of the reaction of sovereign debt markets to the large increases in debt as a share of GDP in the wake of the global financial crisis. In the first part of my remarks, I will discuss the theory and evidence underlying this “New View” of fiscal policy (with, admittedly, the core of this theory being an “Old Old View” that dates back to John Maynard Keynes and the liquidity trap).

Compare that to the Post-Keynesian view, which according to Wynne Godley and Marc Lavoie in their book Monetary Economics written before the crisis (from chapter 1, Introduction):

The alternative paradigm, which has come to be called ‘post-Keynesian’ or ‘structuralist’, derives originally from those economists who were more or less closely associated personally with Keynes such as Joan Robinson, Richard Kahn, Nicholas Kaldor, and James Meade, as well as Michal Kalecki who derived most of his ideas independently.

… According to post-Keynesian ideas, there is no natural tendency for economies to generate full employment, and for this and other reasons growth and stability require the active participation of governments in the form of fiscal, monetary and incomes policy.



Marc Lavoie On The DSGE Emperor

Marc Lavoie has an excellent new article at the Institute For New Economic Thinking website titled Rethinking Macroeconomic Theory Before The Next Crisis.


In this article, I have tried to stress that there is considerable dissatisfaction with the current state of mainstream macroeconomics and with the quasi-dictatorial directive that the only game to be played in town is the adoption of the DSGE model.

Some orthodox economists believe that mainstream economics holds under normal conditions (Richard Koo’s yang phase), but that it needs to be modified under zero-lower bound conditions or during balance sheet recessions (Koo’s yin phase). Macroeconomic theory needs to be revised both for the yang and the yin phases. Providing new clothes to the Naked Emperor of mainstream economics won’t do; the Emperor needs to be dethroned.

The title of this page is the link.

Last updated 20 Oct 2016, 2:54pm UTC – broken link fixed. 

Marc Lavoie On Absolute Advantage Vs. Comparative Advantage

Thanks, the blogger with pen name “Lord Keynes” for reminding us of Marc Lavoie’s fantastic description of free trade, comparative advantage vs. absolute advantage from his book, Post-Keynesian Economics: New Foundations. 

Google Books allows you to read pages 507-509 (if the embed doesn’t open, try another browser):

Marc Lavoie - Absolute Advantage Vs. Comparative Advantage

click picture to read on Google Books.

Marc Lavoie Lectures On Post-Keynesian Economics And Stock-Flow Consistent Modeling

There are two wonderful lectures by Marc Lavoie given at the UMKC two years ago. I had seen them that time but forgot to post it on my blog.

Likely you might have seen it, but if not, here they are.

Lecture 1: Essentials of Heterodox And Post-Keynesian Economics


Marc Lavoie - Essentials Of Heterodox And Post-Keynesian Economics

Click picture to view the video on YouTube.

Lecture 2: Workshop on stock-flow consistent modeling


Marc Lavoie - Workshop On Stock-Flow Consistent Modeling

Click picture to view the video on YouTube.

Being Keynesian In The Short Term And Classical In The Long Term

I am not. But the post is about the possibility. The title is borrowed from a paper by Gérard Duménil and Dominique Lévy.

Steve Roth has an article titled Note To Economists: Saving Doesn’t Create Savings. If you follow his blog regularly, his pieces read

The definition of saving is wrong. Saving is equal to income minus expenditure.

That’s not an exaggeration. He actually says it:

… Since saving = income – expenditures, [aggregate] saving must equal zero.

Steve Keen on Twitter supports Steve Roth.

Steve Keen Tweet

What’s with economists’ dislike for national accounts?

Steve Roth uses the phrase “savings” as a stock. Obviously his claim is just wrong as we know from national accounts:

Change in net worth = Saving + Holding Gains.

(with netting in holding gains).

Steve Keen doesn’t use saving as a stock but as a flow and a plural of saving. But Steve Keen’s point is also wrong. National saving is equal to the sum of saving of all economic units, such as households, firms, government etc. Even the household sector’s propensity to save collectively matters. That’s what macroeconomics is all about.

Now moving the more important point: is it possible that a higher propensity to consume reduces the long run rate of accumulation?

There are several Post-Keynesian economists who have considered the possibility. Of course it should be contrasted with supply side neoclassical economics. A few are Basil Moore, Wynne Godley, Marc Lavoie, and Gérard Duménil and Dominique Lévy as mentioned at the beginning of this post.

In their paper Kaleckian Models of Growth in a Coherent Stock-Flow Monetary Framework: A Kaldorian View, Godley and Lavoie find this in their models (draft version here):

We quickly discovered that the model could be run on the basis of two stable regimes. In the first regime, the investment function reacts less to a change in the valuation ratio-Tobin’s q ratio-than it does to a change in the rate of utilization. In the second regime, the coefficient of the q ratio in the investment function is larger than that of the rate of utilization (γ3 > γ4). The two regimes yield a large number of identical results, but when these results differ, the results of the first regime seem more intuitively acceptable than those of the second regime. For this reason, we shall call the first regime a normal regime, whereas the second regime will be known as the puzzling regime. The first regime also seems to be more in line with the empirical results of Ndikumana (1999) and Semmler and Franke (1996), who find very small values for the coefficient of the q ratio in their investment functions, that is, their empirical results are more in line with the investment coefficients underlying the normal regime.

… In the puzzling regime, the paradox of savings does not hold. The faster rate of accumulation initially encountered is followed by a floundering rate, due to the strong negative effect of the falling q ratio on the investment function. The turnaround in the investment sector also leads to a turnaround in the rate of utilization of capacity. All of this leads to a new steady-state rate of accumulation, which is lower than the rate existing just before the propensity to consume was increased. Thus, in the puzzling regime, although the economy follows Keynesian or Kaleckian behavior in the short-period, long-period results are in line with those obtained in classical models or in neoclassical models of endogenous growth: the higher propensity to consume is associated with a slower rate of accumulation in the steady state. In the puzzling regime, by refusing to save, households have the ability over the long period to undo the short-period investment decisions of entrepreneurs (Moore, 1973). On the basis of the puzzling regime, it would thus be right to say, as Dumenil and Levy (1999) claim, that one can be a Keynesian in the short period, but that one must hold classical views in the long period.

So there is a possibility that a higher propensity to consume leads to a lower growth in the long run. I do not think this is generally true, but this could be possible in some economies.

Two conclusions. It’s counter-productive to mix the definition of saving and what’s called “net lending” in national accounts. It’s possible (which shouldn’t mean that it’s necessarily the case) that Keynes’ paradox of savings doesn’t hold in the long run. I don’t believe that’s the case but purely arguing using national accounts and/or changing definitions won’t do.

Last updated 12 Oct 2016, 1:13pm UTC. Broken link removed. 


What Post-Keynesian Economics Has Brought To An Understanding Of The Global Financial Crisis

I came across a nice Marc Lavoie paper from July 2015 from which I borrowed the titled of this post. Marc Lavoie discusses the importance of PKE monetary economics, stressing flow-of-funds modelling such as as done by Wynne Godley and his prescient analysis of the fate of the US economy and the rest of the world.

(the post title is the link)

Robert Blecker has a great article from the same conference (annual conference of the Canadian Economics Association) discussing similar things: heteredox understanding of the crisis. He discusseses Wynne Godley’s Seven Unsustainable Processes. He also talks of Hyman Minsky and neo-Kaleckian models of how income distribution effects aggregate demand. His paper titled Finance Distribution And The Role Of Government: Heterodox Foundations For Understanding The Crisis is here.

Stock-Flow Inconsistent?

The first rule of Post-Keynesian Economics is: You do not talk make accounting mistakes. The second rule of Post-Keynesian Economics is: You do not talk make accounting mistakes.

– Anonymous.

Jason Smith—who is a physicist—but writes a blog in Macroeconomics, wonders how equations in the simplest stock-flow consistent model given in the textbook Monetary Economics written by Wynne Godley and Marc Lavoie make any sense from a dimensional analysis viewpoint.

He says he

seem[s] to have found a major flaw.

He sees the equation:


and wonders where the time dimensions are. For, H is the stock of money and hence has no time dimension, whereas the right hand side has flows and has time dimensions of inverse of time. For example if the US government spends $4 tn in one year, is $4 tn/year.

In continuous time, the above equation is:

dH/dt = GT

So how are these two equations the same?

Perhaps, Jason is not familiar with difference equations. He instead seems to prefer:

τ·ΔH = GT

Well that’s just wrong if τ is anything different from 1, as a matter of accounting.

Now moving on to time scales, it is true that in difference equations some time scale is implicit. But it doesn’t mean the methodology itself is wrong. Many physicists for example set all constants to 1 and then talk of numbers which are dimensionless.

So if a relativist sets “c=1”, i.e, the speed of light to 1, all velocities are in relation to the speed of light. So if somebody says the speed is 0.004, he/she means the speed is 0.004 times the speed of light.

But Jason Smith says:

Where does this time scale come from over which the adjustment happens? There is some decay constant (half life). It’s never specified (more on scales here and here). If you think this unspecified time scale doesn’t matter, then we can take Δtlp and the adjustment happens instantaneously. Every model would achieve its steady state in the Planck time.

That’s not true. String theorists for example set the parameter α’ = 1. But nobody ever claims that macroscopic adjustments happen at Planckian length scales or time scales.

Coming back to economics, there’s nothing wrong in


There’s an implicit time scale yes, such as a day, or a month, or a year, or even an infinitesimal. But parameters change accordingly. So in G&L models we have the consumption function

 C = α1 ·YD + α2 ·W

where is household consumption, YD, the disposable income and W, the household wealth.

Let’s say I start with a time period of 1 year for simplicity. αmight be 0.4. But if I choose a time period of 1 quarter, αwill correspondingly change to 0.1. In English: if households consume of 4/10th  of their wealth in one year, they consume in 1/10th one quarter.

So if we were to model using a time scale of a quarter instead of a year, α2 will change accordingly.

But the equation


won’t change because it is an accounting identity!

It’s the difference equation version of the differential equation:

dH/dt = GT

Physicists can pontificate on economic matters. I myself know string theory well. But boy, they shouldn’t make mathematical errors and embarrass themselves!

In other words, accounting identities can be written as accounting identities in difference equations. What changes is values of parameters when one chooses a time scale for difference equations.

Wynne Godley’s model is touched by genius. In fact according to one of the reviewers of Monetary Economics, Lance Taylor says that it is out of choice that Wynne Godley chose a difference equation framework. They can be changed to differential equations and we’ll obtain the same underlying dynamics.

Here’s Lance Taylor in A foxy hedgehog: Wynne Godley and macroeconomic modelling

Godley has always preferred to work in discrete time, responding to the way the data are presented.

Question: is the equation ΔH = Gconsistent with dimensional analysis?

Answer: Yes. H is the stock of money at the end of previous period. Δis the change in stock of money in a period. and are the government expenditure and tax revenues in that period. So H, ΔH, G and T have no times dimensions in difference equations. All are in the unit of account. Such as $10tn, $400bn, $4 tn, $3.6tn. Time dynamics is captured by model parameters.

In G&L’s book Monetary Economics, in Appendix 3 of Chapter 3, there’s a mean-lag theorem, which tells you the mean lag between two equilibrium (defined as a state where stock/flow ratios have stabilized):

it is:

[(1 − α1)/α2 ]· [(1 – θ)/θ]

where θ is the tax rate.

So, in the model, assuming a value of 0.6 for α1, 0.4 for α2, and 0.2 for θ we have the mean-lag equal to 4.

Let’s assume that time period is yearly. This means the mean lag is 4 years.

If instead, we were to use quarterly time periods, α2 would be 0.1 and the mean lag evaluates to 16, i.e., sixteen quarters, which is 4 years, same as before.

So there is really no inconsistency in stock-flow consistent models.

tl;dr summary: In difference equations, there’s nothing wrong with equations such as ΔH = GT. It is an accounting identity. By a choice of a time scale, one implicity chooses a time scale for parameter values. What’s wrong? Jason Smith would obtain the same results as the simplest Godley/Lavoie model if he were to work in continuous time and write equations such as dH/dt = GT. I will leave it to him as an exercise!

Last updated 4 Mar 2016, 1:17pm UTC. 

Kalecki And Keynes On Wages

The blogger writing for Social Democracy For The 21st Century: A Post Keynesian Perspective has an interesting post about Keynes’ view on wages.

I have a few points to add, which may not be contradictory to that post. It’s possible Keynes’ understanding changed from his discussions with Kalecki. In fact, Jan Toporowski, biographer of Michael Kalecki sees Kalecki’s position as far superior compared to that of Keynes. In an article titled Kalecki And Keynes On Wages, he says:

Both Kalecki and Keynes realised that their macroeconomic analysis depended critically on the inability of the labour market to be brought into equilibrium by changes in wages, as postulated by neoclassical theory. In 1939 therefore they wrote their explanation for this inability of free markets in capitalism to attain the equilibrium imagined by Robbins, in which all resources, including labour, are fully utilised. Keynes however got stuck on the effects of wages on the short-period equilibrium in an abstract Marshallian model. Kalecki was able to demonstrate more clearly the complex real income effects of wage changes.

Kalecki’s approach to the subject was much clearer, and free of Marshallian dilemmas applied to historical data.

Jan Toporowski

Jan Toporowski, Levy Institute, May 2011

In the article, Toporowski points out the debate between Keynes and John T. Dunlop, Lorie Tarshis and Michal Kalecki. He also quotes Keynes from the GT:

in the short period, falling money wages and rising real wages are each, for independent reasons, likely to accompany decreasing employment; labour being readier to accept wage-cuts when employment is falling off, yet real wages inevitably rising in the same circumstances on account of the increasing marginal return to a given capital equipment when output is diminished.

Keynes was not fully correct on this but it is interesting to note that he was almost there. Perhaps his own quote explains: he himself couldn’t escape from old ideas which ramify into every corner of our minds.

In his book Post-Keynesian Economics: New Foundations, pp 277-278, Marc Lavoie says:

Indeed, in several versions of post-Keynesian short-run model of employment, higher real wages are conducive to higher levels of employment.

In their biography, Michal Kalecki (Great Thinkers In Economics), Julio López G and Michaël Assous point out that it was Michal Kalecki who first figured this out before Dunlop-Tarshis-Kalecki (1939) in his 1938 paper The determinants of distribution of the national income, also published in Collected works of Michal Kalecki, Vol. I, edited by J. Osiatynsky, Oxford University Press, 1990.


Collected Works Of Michal Kalecki - Volume 1


So here’s Kalecki. It’s great and humble of him to call it the “Keynesian theory”, although he found something contrary to Keynes’ own point. But that’s the thing about Keynes – he said a lot of things which is contrary to his own revolutionary thoughts. Heterodox economists see it in a nicer way. Joan Robinson would have said, “Keynes should not have said that”. Keynes’ opponents would pounce on his several vulnerabilities. And then there’s the bastardization of Keynes’ work. Most of economics before the crisis simply states: “Keynes is wrong”.  Over to Kalecki:

Final remarks

1. There are certain ‘workers’ friends’ who try to persuade the working class to abandon the fight for wages in its own interest, of course. The usual argument used for this purpose is that the increase of wages causes unemployment, and is thus detrimental to the working class as a whole.

The Keynesian theory undermines the foundation of this argument. Our investigation above has shown that a wage increase may change employment in either direction, but that this change is unlikely to be important. A wage increase, however, affects to a certain extent the distribution of income: it tends to reduce the degree of monopoly and thus to raise real wages. On the other hand, ‘real’ capitalist incomes tend to fall off because of the relative shift of income from rentiers to corporations, which lowers capitalist propensity to consume.

If viewed from this standpoint, strikes must have the full sympathy of ‘workers’ friends’. For a rise in wages tends to reduce the degree of monopoly, and thus to bring our imperfect system nearer to the ideal or free competition. On the other hand, it tends to increase the thriftiness of capitalists by causing a relative shift of income from rentiers to corporations. And ‘workers’ friends’ are usually admirers both of free competition and or thrift as a virtue of the capitalist class.

2. Another question may arise in connection with the Keynesian theory of wages. Is not the struggle of workers for higher wages idle if they lose whatever gain they may make in the form of a higher cost of living? We have shown that wage reduction causes a change in the distribution of the national income to the disadvantage of workers, and that in the event of an increase in wages the reverse occurs. This is not to deny, however, that changes in real wages are much smaller than those in money wages; but never the less they may be quite material, especially as we are dealing with averages which reflect only slightly great fluctuations in real wages in particular industries.

We noticed above the great stability of the relative share of manual labour in the national income. This is not in contradiction with the influence of money wages upon the distribution of the national income. On the contrary, the resistance to wage cuts prevents the degree of monopoly from rising in the slump to the extent it would if ‘free competition’ prevailed on the labour market. Although, in fact, the relative share of manual labour is more or less stable, this would not obtain if wages were very elastic.

It is quite true that the fight for wages is not likely to bring about fundamental changes in the distribution of the national income. Income and capital taxation are much more potent weapons to achieve this aim, for these taxes (as opposed to commodity taxes) do not affect prime costs, and thus do not tend to raise prices. But in order to redistribute income in this way, the government must have both the will and the power to carry it out, and this is unlikely in a capitalist system.

Last edited 29 Oct 2016, 7:12pm UTC – broken link fixed.

Marc Lavoie On The New Fiscalism

Writing for the Broadbent Institute’s blog, Marc Lavoie argues that now that Conservatives are out of power in Canada, the Federal Balanced Budget Act passed in June 2015 should be repealed. According to the Act, pay of the Prime Minister and Ministers and Deputy Ministers have to be reduced by 5% if the federal government is in deficit outside a recession and frozen if the economy is in recession.

Marc Lavoie says:

The Federal Balanced Budget Act that was included in the omnibus Bill C-59, and which passed third reading in June 2015, does not seem to have attracted much engagement either. The Act does not force the federal government to adopt a balanced budget – it has some of the flexibility advocated by the PBO. But it includes measures that discourage the federal government from taking expansionary fiscal measures pre-emptively before a recession is declared. Furthermore, it will induce the federal government to attempt to minimize budget deficits during recessions and to quickly achieve a balanced budget or budget surpluses.

The article also coins the phrase new fiscalism (term originally by Mario Seccareccia):

counter-cyclical fiscal policy should only be used when things are really bad, in particular when monetary policy seems to be running out of ammunition; otherwise, governments should achieve balanced budgets or surpluses.

Marc Lavoie instead argues that the Canadian federal government should use the large borrowing powers to aim to achieve full employment.

The full article Wage Suppression And The Federal Balanced Budget Act is here.

Rules about fiscal policy always have some dubiousness about them. This can easily be seen in stock-flow consistent (SFC) models. Let government expenditure be denoted by G, the tax rate by θ, and households’ propensities to consume out of income and wealth by α1 and α2, respectively. Imagine two almost similar economies

Economy 1: High propensities to consume – i.e., high values for α1 and α2.

Economy 2: Low propensities to consume – i.e., low values for α1 and α2.

Also assume the government expenditure G, and the tax rate θ are the same for both the economies. The budget deficit depends (among other things such as firms’ behavior) on G, θ, α1 and α2. Economy 1 will have a lower budget deficit and higher output and employment than Economy 2. So in order for Economy 2 to have the same level of output and employment as Economy 1, the government of Economy 2 should have a more expansionary fiscal policy than Economy 2. What the fiscal rules do is to endogenize fiscal policy (the government G and the average tax rate θ) with respect to the budget deficit.  This is further deflationary for Economy 2. This implies that fiscal rules have no legitimacy. Even within an economy, (such as either Economy 1 or Economy 2), propensities to consume are changing with time.

Fiscal policy rules sometimes are slightly less strict and accept balancing current expenditures with taxes. Even this is dubious – expenditure on paying school teachers isn’t less important in any sense than building a school. Even more importantly, the budget deficit depends on the current account balance of payments and a nation with a higher current account deficit than a similar economy with no external trade will have a lower output and higher budget deficit for the same fiscal policy.

Budget rules are hence deflationary to output and are anti-full-employment.

I hope the new Canadian government follows Marc Lavoie’s advice.