Monthly Archives: January 2014

Nice Thomas Palley Interview

Here’s a nice Tom Palley interview from yesterday with Erin Ade for the program Boom Bust where he touches on various economic issues of recent years for the United States and consequently for the rest of the world such as the global race to the bottom.

(h/t Matias Vernengo):

click to watch the video on YouTube

The interview points out the different meaning of what Keynesianism is and ought to be. In particular, it talks of the word stagnation and Palley points out that this phrase is not new and only recently have Paul Krugman and Larry Summers realized the importance of it.

As you may be aware, Joan Robinson used the phrase Bastard Keynesianism to describe the Samuelson et. al.

Incidentally, just today I read Joan Robinson’s article Full Employment And Inflation (originally a lecture from 1958 and published in her Collected Economic Papers, Vol II) where she talks of stagnation:

Formerly economic theory drew a very flattering picture of the private-enterprise system. It was depicted as a beautiful machine with delicately-balanced interacting parts and with a self-righting mechanism that ensured that it kept itself in balance. Full employment of labour was regarded as a normal state of affairs and stability in the value of money taken for granted. Equilibrium in international trade only required the abolition of tariffs and the maintenance of the gold standard. Any departure of actual developments from the ideal equilibrium  was regarded as due to frictions which the operation of the machine would overcome by itself, or were attributed to the stupid interference of governments which were often foolish enough to depart from the strict rule of laisser-faire. 

All this was shattered by experience in the inter-war period of massive unemployment and chronic crisis. A new theory was formulated by Keynes in place of the discredited orthodoxy. He showed that there is, in fact, no self-righting mechanism in a laisser-faire system. Periodic crises and chronic stagnation are quite natural and to be expected in an unregulated system, and the maintenance of full employment requires a strong and active government policy.

The Bastard Keynesians on the other hand, in the guise of “Keynesianism” simply ignore all this and in fact their views are quite the same as Robinson talks of in the first paragraph of the above quote. Of course in recent times, economists such as Krugman have changed a bit but finally their view of the world is still Samuelsonian or Pigouvian (in spite of the fact that Krugman did a mea culpa recently on this).

Joan Robinson On Economists

I managed to get hold of Joan Robinson’s article Marx, Marshall And Keynes, published by the Delhi School of Economics as Occasional Paper No. 9 in 1955 based on lectures given by her at the School and republished in her Collected Economic Papers, Volume II.

It is an interesting essay on economists in general via analysing the ideas of Marx, Marshall and Keynes. So here are some gems.

From Introduction (page iv):

… Analysis dealing with actual events encounters the difficulty that the answers to economic problems are only political questions. With politics, enters ideological prejudice. As Gunnar Myrdal has pointed out, the very choice of questions to discuss is an expression of ideology; yet I believe that economic analysis, though it cannot help containing an element of propaganda, yet can be scientific as well. This question is discussed in the first paper,  ‘Marx, Marshall and Keynes’.

I have always aimed to make my own prejudices sufficiently obvious to allow a reader, while studying the argument, to discount them as he thinks fit, though of course, this generally leads a reader of opposite prejudices to reject the argument in advance …

From the main essay (pages 3-5):

… Economic doctrines always come to us propaganda. This is bound up with the very nature of the subject and to pretend that it is not so in the name of ‘pure science’ is a very unscientific refusal to accept the facts.

The element of propaganda is inherent in the subject because it is concerned with policy. It would be of no interest if it were not. If you want a subject that is worth pursuing for its intrinsic appeal without any view to consequences you would not be attending a lecture on economics. You would be, say, doing pure mathematics or studying the behaviour of birds.

The once orthodox laisser-faire theory evaded the issue by trying to show that there is no problem about choosing policies. Let everyone pursue self-interest and free competition will ensure the maximum benefit for everyone. This obviously cannot apply where any over-all organization is necessary …

… Economic theory, in its scientific aspect, is concerned with showing how a particular set of rules of the game operates, but in doing so it cannot help them appear in a favourable or unfavourable light to the people who are playing the game. Even if a writer can school himself to perfect detachment he is still making propaganda, for his readers have interested views …

… This element of propaganda enters into even the most severly technical details of the subject. It cannot fail to be present when the broad issue of the system as a whole is under discussion …

… The description and the evaluation cannot be separated, and to pretend that we are not interested in the evaluation is mere self-deception.

In the section ‘Ideas and Ideology’, Robinson says:

We must admit that every economic doctrine that is not trivial formalism contains political judgments. But it is the greatest possible folly to choose the doctrines that we want to accept by their political content. It is folly to reject a piece of analysis because we do not agree with the political judgement of the economist who puts it forward. Unfortunately, this approach to economics is very prevalent …

… To learn from the economists regarded as scientists it is necessary to separate what is valid in their description of the system from the propaganda that they make, overtly or unconsciously, each for his own ideology. The best way to separate out scientific ideas from ideology is to stand the ideology on its head and see how the ideas look the other way up. If they disintegrate with the ideology, they have no validity on their own. If they make sense as a description of reality, then there is something to be learned from them, whether we like the ideology or not.

In the section ‘The Great Contradictions’ she says:

It is foolish to refuse to learn from the ideas of an economist whose ideology we dislike. It is equally unwise to rely upon the theories of one whose ideology we approve …

… In short, no economic theory gives us ready-made answers. Any theory that we follow blindly will lead us astray. To make good use of an economic theory we must first sort out the relations of the propagandist and the scientific elements in it, then by checking with experience, see how far the scientific element appears convincing, and finally recombine it with our own political views. The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.


Joan Robinson - Collected Economic Papers, Volume II

New Book By Felipe And McCombie

The production function has been a powerful instrument of miseducation.

– Joan Robinson (1953–54), The Production Function and the Theory of Capital, Review of Economic Studies, vol. 21(2), pp. 81–106. (jstor)

… that is how Jesus Felipe and John McCombie begin their new book The Aggregate Production Function and the Measurement of Technical Change.

I have observed that although neoclassical economists use the aggregate production function heavily, even those who do not learn it somehow err and assume it implicitly somewhere in their analysis. This book I believe is a rewriting of both authors’ work in this area collecting various papers written in many places — critiquing the very “foundation” of neoclassical economics.

From the publisher’s site for the book:

‘This is an extremely important and long-awaited book. The authors provide a cogent guide to all that is wrong with the theory and empirical applications of the discredited notion of an aggregate production function. Their critique has devastating implications for orthodox macroeconomics.’ – Anwar Shaikh, New School for Social Research, US

h/t Matias Vernengo

The DWYL Mantra

Wow, In The Name Of Love by Miya Tokumitsu for the magazine Jacobin (Issue 13) is one of the finest essays I have read.

There’s little doubt that “do what you love” (DWYL) is now the unofficial work mantra for our time. The problem is that it leads not to salvation, but to the devaluation of actual work, including the very work it pretends to elevate — and more importantly, the dehumanization of the vast majority of laborers

In ignoring most work and reclassifying the rest as love, DWYL may be the most elegant anti-worker ideology around. Why should workers assemble and assert their class interests if there’s no such thing as work?

Read the full article at the website


Goodbye Global Imbalances?

In an article A Requiem for Global Imbalances for Project Syndicate, Barry Eichengreen writes as if global imbalances are a thing of the past and international trade in one less thing to worry about for the world economy.

This follows some articles a few months back charting Euro Area current account balances which claimed Euro Area imbalances are a thing of the past!

That silly economist intuition!

Balance-of-payments problems show themselves in two ways. One is a a financial crisis in the external sector which can lead to exceptional financing transactions by the government such as by borrowing from the IMF followed by deflationary measures imposed. The other way is by preventing nations from achieving the potential output because an expansionary fiscal and monetary policy will lead to potential balance-of-payments problems.

The reduction of the U.S. trade deficits among other things is also a result of the deflationary fiscal policy adopted which has kept domestic demand low and resulting in lower imports than otherwise.

Nicky Kaldor’s footnotes are always interesting. In a 1980 article The Foundations Of Free Trade Theory And Their Implications For The Current World Recession (published in Collected Essays Vol. 9) critiquing free trade and free trade theory, Kaldor writes:

… But apart from such cases (which account for only a fraction of the imbalances of trade between industrialised countries) the existence of surpluses and deficits in the intra-trade of the developed industrialised countries is evidence of an asymmetrical relationship—some countries tend to export more (at the prevailing level of production and employment) than they wish to import, whereas others suffer from the insufficiency of exports relative to their import propensity which prevents them from utilising their own production potential fully. The evidence for this consists of overall surpluses and deficits in foreign trade of the various industrial countries which are of chronic nature—which tend to persist year after year despite variations in relative costs, exchange rates, etc.

The footnote to this has a great insight:

Morever, the actual surpluses and deficits are not a proper measure of the potential size of such imbalances (and of the deflationary force they exert) since the countries who suffer from an excessive import propensity tend, on that account, to suffer from an insufficiency of domestic demand as well so their aggregate output or income is demand-constrained; they may, in addition be forced to follow a deflationary fiscal and monetary policy, and for both of these reasons, will import less from the surplus countries than they would do under full employment conditions.

He’s An Economist!

[The  financial crisis is worse than thought …]

James Hacker: Bernard, Humphrey should have seen this coming and warned me.

Bernard Woolley: I don’t think Sir Humphrey understands economics, Prime Minister; he did read Classics, you know.

James Hacker: What about Sir Frank? He’s head of the Treasury!

Bernard Woolley: Well I’m afraid he’s at an even greater disadvantage in understanding economics: he’s an economist.

– Yes Prime Minister, A Real Partnership (source: IMDb, iTunes store link)

Yes Minister - A Real Partnership

On Models

Ryan Decker has a blog post on DSGE models. Although I don’t like DSGE models, I think he has something nice to say about modeling:

We must get econ pundits to understand that we’re all using models, including non-economist bloggers, even if they’re not written down as mathematical expressions. Writing a model down in its entirety so that its assumptions are made explicit and its internal workings can be examined by anyone is an act of intellectual humility. It is baffling to me that people who write down their models formally so we can all argue about them are supposedly worse and more arrogant than those who think they can identify a narrative model’s assumptions and keep it internally consistent.

James Tobin had something similar to say in his 1982 Nobel lecture Money and Finance in the Macroeconomic Process (alternative link):

Theoretical macroeconomic models of one brand or another are very influential. They guide the architects of econometric forecasting models. They shape the thinking of policymakers and their advisers about “the way the world works.” They color the views of journalists, managers, teachers, housewives, politicians, and voters. Almost everyone thinks about the economy, tries to understand it, and has opinions on how to improve its performance. Anyone who does so uses a model, even if it is vague and informal.

[emphasis added]

In his 1999 paper Money And Credit In A Keynesian Model Of Income Determination, Wynne Godley says:

This paper takes a step in the right direction by incorporating EM [endogenous money] ideas into a complete, if very much simplified model of the whole economy. Writings on monetary theory commonly rely solely on a narrative method which puts a strain on the reader’s imagination and makes disagreements difficult to resolve. The narratives in this paper will all describe simulations which are grounded in a rigorous model, which will make it possible to pin down exactly why the results come out as they do.

Personally I find stock-flow consistent models extremely useful to think about the working of the world as a whole. It is when you sit down and work through the models, that you realize how complicated the whole thing is and how naive intuition isn’t good enough. Of course models aren’t the only way to study, so one needs a mix of models and a non-mathematical narrative and some empirical analysis to add colour to the story. It is true models have disadvantages but beware of people who just highlight the disadvantages and don’t know the advantages because their intuition is also a naive model of the world.

Interest Rates And Investment

There is a new interesting Federal Reserve paper The insensitivity of investment to interest rates: Evidence from a survey of CFOs.


A fundamental tenet of investment theory and the traditional theory of monetary policy transmission is that investment expenditures by businesses are negatively affected by interest rates. Yet, a large body of empirical research offer mixed evidence, at best, for a substantial interest-rate effect on investment. In this paper, we examine the sensitivity of investment plans to interest rates using a set of special questions asked of CFOs in the Global Business Outlook Survey conducted in the third quarter of 2012. Among the more than 500 responses to the special questions, we find that most firms claim to be quite insensitive to decreases in interest rates, and only mildly more responsive to interest rate increases. Most CFOs cited ample cash or the low level of interest rates, as explanations for their own insensitivity. We also find that sensitivity to interest rate changes tends to be lower among firms that do not report being concerned about working capital management as well as those that do not expect to borrow over the coming year. Perhaps more surprisingly, we find that investment is also less interest sensitive among firms expecting greater revenue growth. These findings seem to be corroborated by a cursory meta-analysis of average hurdle rates drawn from firm-level surveys at different times over the past 30 years, which exhibit no apparent relation to market interest rates.

The survey makes sense on a cursory look and lot of economists – especially Post-Keynesians assume away the interest sensitivity of interest rates on business investment in models many times. This is because demand for their goods and services is far more important than interest payments.

There are many complications however. Inventory building can have sensitivities to interest rates – although this may not be too significant. I am not sure the same can be said for house purchases. People’s knowledge of movements of mortgage rates can sometimes be surprising. If interest rates are dropped, households can purchase more houses on credit and this leads to a higher output and higher national income and more demand for firms’ products and services inducing more business investment – a multiplier effect. So indirectly interest rates can be said to have an effect on business investment. A resultant stock market rise – if there is one – can lead to wealth effects i.e., rise in output caused by rise in consumption due to capital gains and rise in household wealth.

One can think of international effects as well. If other central banks do not change interest rates, the domestic currency can depreciate against foreign currencies and this may slightly improve price-competitiveness of firms compared to foreign firms and improve exports and lead to some amount of imports substitution. This will have its own multiplier effect.

Of course like other channels mentioned above, this is not guaranteed to work and to the extent needed. A drop in the short term interest rate by the central bank can induce portfolio investment from abroad into equities and the exchange rate may not fall and instead rise. Also if households incomes have dropped due to a recent recession, they may not buy homes just because interest rates have dropped.

What about the reverse? A rise in interest rates – in addition to a reduced demand for house purchases – can lead to a higher interest burden of households on existing loans for house purchases, reduce domestic demand due to a drop in consumption and cause a fall in firms’ investment.

This post of course just touches these things and isn’t a claim to be anything like a full analysis. Models can be helpful in bringing these things more clearly. But models themselves have limitations so one needs a mix of empirical analysis to study such things.

Even empirical studies may be difficult.  Nicholas Kaldor’s in his 1958 article Monetary Policy, Economic Stability And Growth (republished in Collected Essays, Vol. 3, page 133) points out:

It must be remembered that in times of full employment, or even of approximately full employment, the capacity of the investment goods industries may exert a far more important limitation on the level of capital expenditure than the cost of borrowing or the availability of particular forms of finance. Thus the rate of building and constructional activity may be confined by the availability of building and constructional labour; expenditure on plant and equipment may be limited by lengthening delivery periods on new contracts. In such situations, the range of projects whose execution would be influenced by changes in the cost of borrowing or in the availability of loans might be unusually narrow …

So if we have some empirical data, how do we decide whether the slowdown of output in whichever period in the data the output slowed down was caused due to an increase in short term interest rate by the central bank or because of capacity constraints? The answer in my opinion is more empirical research and more model building.

It is also worth mentioning that despite so many complications, the economics profession pretends that fiscal policy is somewhat less important and ignores it as compared to monetary policy. Things have changed a little during after the crisis but one never knows when they take a U-turn on such issues.

Augusto Graziani And The Theory Of The Monetary Circuit

One of Augusto Graziani’s best papers was The Theory Of The Monetary Circuit, Économies et Sociétés, 24 (6) (June), pp. 7–36. The paper is available at the UMKC course site here.

One description of money is looking at payments as triangular transactions. Graziani says that for money to exist, three conditions have to be met:

  1. since money cannot be a commodity, it can only be a token money;
  2. the use of money must give rise to an immediate and final payment and not a simple commitment to make a payment in the future; and
  3. the use of money must be so regulated as to give no privilege of seignoriage to any agent

The phrase “money circuit” was actually first used by Morris Copeland – the discover of flow of funds in his book A Study of Moneyflows in the United States

A Study Of Moneyflows In The United States - Morris Copeland

(image credit: Xerxes Books, from whom I obtained the copy)

In his book, he actually draws a diagram of a circuit – on the inside covers and on page 245:

The Main Money Circuit

The circuitists’ motivation for using the phrase “circuit” was a circular flow starting with credit but Copeland was in total opposition of the usage of the phrase “hyrdraulic/s” and the misleading notions that this latter phrase conveys about money. Hence he proposed the phrase money circuit. Check his book on why this is so for details. I will at some point write about Copeland’s arguments.

Structural Keynesianism

There’s a new book Restoring Shared Prosperity: a Policy Agenda from Leading Keynesian Economists edited by Thomas Palley and Gustav Horn.

This book is the product of two day-long conferences held in Washington, DC and Berlin on February 11 and March 11, 2013 respectively.

Palley’s description:

The economic recovery in the US since the Great Recession has remained sub-par and beset by persistent fear it might weaken again. Even if that is avoided, the most likely outcome is continued weak growth, accompanied by high unemployment and historically high levels of income inequality. In Europe, the recovery from the Great Recession has been even worse, with the euro zone beset by an unresolved euro crisis that has already contributed to a double-dip recession in the region. This book offers an alternative agenda for shared prosperity to that on offer from mainstream economists. The thinking is rooted in the Keynesian analytic tradition, which has been substantially vindicated by events. However, pure Keynesian macroeconomic analysis is supplemented by a focus on the institutions and policy interventions needed for an economy to generate productive full employment with contained income inequality. Such a perspective can be termed “structural Keynesianism”. These are critical times and the public deserves an open debate that does not arbitrarily or ideologically lock out alternative perspectives and policy ideas. The book contains a collection of essays that offer a credible policy program for shared prosperity, rooted in a clear narrative that cuts through the economic confusions that currently bedevil debate.

Contributions by Richard L Trumka, Thomas I Palley, Gustav A Horn, Andreas Botsch, Josh Bivens, Achim Truger, Jared Bernstein, Robert Pollin, Dean Baker, Gerald Epstein, Damon Silvers, Jennifer Taub, Silke Tober, Jan Priewe, John Schmitt, Heidi Shierholz, William E Spriggs, Eckhard Hein, Heiner Flassbeck, Gerhard Bosch, Michael Dauderstädt.

The book is available for $8.35 at, for Є5.52 at, and £4.64 at

A free PDF is available here.

Restoring Shared Prosperity