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.
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 that there should be a proportional relationship — increase the monetary base by 400 percent, and the price level should also rise by 400 percent. And the historical record seems to confirm this idea.
His post is about how this fails when the economy is in a “liquidity trap”. The post hence is the clearest proof of Paul Krugman’s struggle in getting the causality right. Keynes quote from the GT is appropriate here:
The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.
Krugman presents a chart which shows the relationship between money and prices but it does not occur to him that the causality is reverse to what he is assuming, whether or not there is a liquidity trap. The simple causal story that a rise in the level of expenditure leads to a rise in the stock of money seems alien to Krugman.
It is of course also true that a rise in the stock of money such as via an asset purchase program by the central bank (“QE”) may have an effect on prices. This happens via a wealth effect: demand has an effect on prices of goods and services. This effect is likely small. The main mechanism — the reverse causality — seems to never occur in Krugman’s mental model of the way the world works.
Krugman has of course written about the “dark age of Macroeconomics”, but has shifted his position since then. Although it is not clear what exactly Krugman’s model is, one can still make an inference: normal equilibrium models work outside of liquidity traps, but in liquidity traps a lot changes. This model is chosen by Krugman so that he can confidently claim that there is hardly anything wrong in Macroeconomics.
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) the weak performance of net exports, (2) pervasive fiscal conservatism, and (3) high income inequality
They show that in their baseline scenario, if the projections of the Congressional Budget Office’s outlook hold, their model simulations imply that the private sector’s net lending would turn negative by the end of 2017 and hence the private sector would be in a financial deficit, which is not sustainable.
The publication has some nice charts about the US balance of payments. One is the components of the current account of balance of payments with attention on the primary income balance:
Note how the balance on primary income has grown during the recent crisis. Another chart gives a further breakdown:
So direct investment income is the main component.
I like the way the authors explain this: it is a symptom of the crisis. From the article:
An interesting question is whether this improvement in net primary income receipts is sustainable or just symptomatic of the crisis. In our view, it is most likely the latter.
For more details, read the article here.
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 fast enough to raise wages.
Average hourly earnings for production & non-supervisory workers, who are eighty percent of the workforce, are up just 1.85 percent over the past year. In April, the rate of wage increase actually declined.
The broad (U-6) measure of unemployment stands at 10.8 percent, which is far above the level of past economic cycles. Furthermore, unemployment is widespread across all business sectors. The labor force participation rate also remains at a historically low level, indicating that many workers stand ready to re-enter the work force when jobs become available. Together, these conditions show labor supply is plentiful and there is no threat of inflationary shortages.
Given the housing recovery and credit financed auto purchases, our economy should be generating many more jobs. An important reason why it is not is the trade deficit which surged to $51.4 billion in March. That explains why manufacturing job growth has ground to a standstill and why the average manufacturing work week and factory overtime hours edged down.
The trade deficit is due to our failed NAFTA trade policies and the strong dollar, and it means we are creating jobs offshore rather than within the US economy. To return to full employment and shared prosperity we need the Federal Reserve to hold off raising interest rates. We also need to close the trade deficit and fix our flawed trade policies, which begins with Congress saying “no” to Fast Track trade authority that would promote more bad trade agreements.
This article first appeared on Thomas Palley’s blog here