Category Archives: Uncategorized

Roy Harrod On The Balance-Of-Payments Constraint

I am always interested on how close economists come on a full model of how the world works. And so I found this passage from John McCombie in his article Harrod, Economic Growth And International Trade on Roy Harrod in the book Economic Dynamics, Trade And Growth: Essays On Harrodian Themes interesting:

Harrod, through the development of his open economy model, implicitly saw the fallacy of Keynes’s argument. On the basis of a model with no government sector, Harrod (1948, p. 103) noted that ‘the balance of trade depends upon whether the ratio of the volume of exports to the volume of home investment is greater or less than the ratio of the propensity to import (viz. imports represented as a fraction of income) to the propensity to save’. But there was no reason why, at full employment, these ratios should be equal and why the balance of payments should be in equilibrium. If there was initially a balance-of-payments disequilibrium, and it was impossible to finance perpetually the deficit, there would be a financial crisis and ‘investment would come tumbling down’. It is here that we perhaps have the first reference to the possibility of a balance-of-payments constraint, where conditions in the external markets dictate the level of domestic activity. Harrod also appreciated early on the deflationary bias which the balance-of-payments imposed on the international system, with the burden of adjustment falling on the deficit countries and where there was little to force a surplus country to expand its level of economic activity.

References

Harrod, R.F. (1948), Towards a Dynamic Economics, London: Macmillan.

Marc Lavoie’s New Book — Post-Keynesian Growth Theory: Selected Essays

Marc Lavoie’s has a new book Post-Keynesian Growth Theory: Selected Essays with a collection of his essays on some of his important papers on growth. The cover features Michal Kalecki, Nicholas Kaldor, Joan Robinson and Luigi Pasinetti. Will be out soon.

In the same series, there’s also a book from 2020 Post-Keynesian Monetary Theory: Selected Essays. You can preview the introduction to this book on Google Books. So even if you’ve read all the papers, don’t miss the detailed introduction which gives an idea of his thoughts through the years. It also has a foreword by Louis-Philippe Rochon. And an interview with him on that book.

There are also two more separate videos you might be interested: Introduction To Post-Keynesian Economics For The Post-COVID Era and The Importance Of Michal Kalecki.

Biographies Of Nicholas Kaldor

There’s a new short biography of Nicholas Kaldor titled Nicholas Kaldor’s Economics: A Review by Luis Gomes. The author reminds of Kaldor’s proposals for the world as a whole, something which is highly needed today more than ever (and something I regularly refer to):

In 1984 Nicholas Kaldor gave a series of lectures in Italy, which become a posthumous book in 1996. These lectures [“Causes of Growth and Stagnation in the World Economy” … ] presented an integrated set of policies with which to tackle economic problems. In this series of lectures, Nicholas Kaldor commented on the four basic principles for good macroeconomic administration: (i) it is needed a coordinated fiscal action which include a set of targets for a balanced balance of payments and a full employment budget; (ii) the interest rate should be the lowest possible: (iii) it is important to prevent the volatility of international commodity prices (via stocks and via an international currency) (iv) it is necessary to overcome chronic inflation trends under full employment, due to the system of adjusting wages via sectoral collective agreement …

There are many biographies (from short articles to full papers) and I thought I should list them:

  1. A short article titled Portrait: Nicholas Kaldor by Luigi Pasinetti, published in 1981 published in Challenge.
  2. Luigi Pasinetti’s Nicholas Kaldor: A Few Personal Notes, published in 1983.
  3. Anthony Thirlwall’s 1987 book titled Nicholas Kaldor,
  4. Anthony Thirlwall’s 1987 article Nicholas Kaldor 1908–1986. Republished 1991 in the book Nicholas Kaldor And Mainstream Economics Confrontation Or Convergence? and again in 2015 in the book Essays On Keynesian And Kaldorian Economics.
  5. Geoffrey Harcourt’s article Nicholas Kaldor, 12 May 1908–30 September 1986 published in 1988 in Economica and republished in the book Post-Keynesian Essays In Biography by Harcourt himself.
  6. Ferdinando Targetti’s 1992 book Nicholas Kaldor: The Economics And Politics Of Capitalism As A Dynamic System.
  7. Marjorie Shepherd Turner’s book Nicholas Kaldor And The Real World published in 1993.
  8. Anthony Thirwall’s section Nicholas Kaldor, A Biography in Nicholas Kaldor’s book Causes Of Growth And Stagnation In The World Economy published posthumously in 1996.
  9. Adrian Wood‘s entry Kaldor, Nicholas (1908–1986) in The New Palgrave Dictionary Of Economics published in 2008.
  10. John E. King’s book Nicholas Kaldor published in 2008.
  11. Luigi Pasinetti’s chapter Nicholas Kaldor (1908–1986): Growth, Income Distribution, Technical Progress in his book Keynes And The Cambridge Keynesians: A ‘Revolution in Economics’ To Be Accomplished, published in 2009.
  12. John E. King’s chapter Nicholas Kaldor (1908–1986) in the book Handbook On The History Of Economic Analysis Volume I published in 2016.
  13. John E. King’s chapter Nicholas Kaldor (1908–1986) in The Palgrave Companion To Cambridge Economics published in 2017. (h/t Marc Lavoie).

Apart from the above, following are useful to know about Nicholas Kaldor, although can’t be described as biography:

  • Introduction by Ferdinand Targetti and Anthony Thirlwall to the book The Essential Kaldor, a collection of papers of Kaldor, published in 1989.

Have I missed any?

Gunnar Myrdal And Circular, Cumulative Causation

The practical triumph of the free trade doctrine is the fact that even the severest critics of the general policy line of noninterference usually find it difficult to free themselves from its fascination.

– Gunnar Myrdal

I was reading this book The Dynamics Of Poverty: Circular, Cumulative Causation, Value Judgments, Institutions And Social Engineering In The World Of Gunnar Myrdal by Mats Lundahl, which is a sort of an intellectual biography published in 2021.

Gunnar Myrdal was the first to apply his own idea of circular, cumulative causation to international trade and success and failure of nations. Roughly it means: success breeds further success and failure begets more failure, in the words of Nicholas Kaldor.

Although the idea was original to Myrdal, the detailed mechanism was first formulated by Nicholas Kaldor in 1970 in his paper The Case For Regional Policies.

According to Lundahl’s book Myrdal’s genius can be found in the following works (page 82):

Gunnar Myrdal also spent much of the 1950s working on problems related to poverty and inequality on the international level and on the relation between polarization between regions within a country and polarization between countries. This resulted in a ‘trilogy’: An International Economy, Development and Under-Development: A Note on the Mechanism of National and International Economic Inequality, usually referred to as his Cairo lectures, and Economic Theory and Under-Developed Regions (or Rich Lands and Poor).18

18Myrdal (1956a, 1956b, 1957a, 1957b).

References

  • Myrdal, Gunnar (1956a), An International Economy: Problems and Prospects. New York: Harper & Brothers Publishers
  • Myrdal, Gunnar (1956b), Development and Under-Development: A Note on the Mechanism of National and International Economic Inequality. Cairo: National Bank of Egypt
  • Myrdal, Gunnar (1957a), Economic Theory and Under-Developed Regions. London: Gerald Duckworth & Co
  • Myrdal, Gunnar (1957b), Rich Lands and Poor: The Road to World Prosperity. New York: Harper & Brothers

You can find the first and the third/fourth book (which are the same but just different names in the UK and the US) at Internet Archive in this link. “Cairo Lectures”, seems difficult to obtain, but the important part Trade As A Mechanism Of International Equality can be found in Gerald M. Meier’s book Leading Issues In Economic Development.

Neochartalists On Turkey, Part 2

This is in continuation of the post Neochartalists (“MMTers”) On Turkey, written three days ago and which didn’t discuss what neochartalists (“MMT” people) have to say about the crisis. I am looking specifically a blog post Turkey Tells Us Nothing About MMT – But MMT Tells Us A Lot About Why Turkey Is In Trouble by Bill Mitchell written yesterday.

Bill Mitchell is responding to critics and he describes their criticisms as follows:

I have noticed a lot of Internet traffic about Modern Monetary Theory (MMT) and the situation in Turkey at present. Apparently, as the narrative goes, MMT is finally being revealed as a fraud because Turkey’s economy is going backwards and its currency is depreciating rapidly. The logic, it seems, is that if a nation enters rough economic waters and the financial markets sell its currency (although remember someone has to be buying it simultaneously) then that proves MMT is false. An extraordinarily naive viewpoint if you think about it.

As if someone having to be buying it simultaneously is some kind of owning of critics!

Anyways, Mitchell straightforwardly denies there’s some issue with neochartalism in the conclusion:

What is clear, an MMT understanding leads one to worry intensely about a nation that has built a growth strategy on vast amounts of foreign currency debt and expanding exports. The two arms of this sort of growth strategy leaves a nation highly vulnerable to changes of circumstances in world export markets.

Add in a central bank that is also borrowing foreign currencies and showing it intends to use their stores to defend the lira.

Add in a deregulated banking sector that is flooded with foreign debt to maintain profits.

Result: disaster pending.

So at least he accepts there’s a crisis rather than dismissing the whole thing as meh!

I don’t think his point about over-reliance on exports is correct but his main points is the holding of foreign currency debt by the government (or the central bank).

The important point however is that an external crisis will always go through a phase where the government has negative open positions in foreign currency. Neochartalists can always claim that neochartalism is right but that’s useless to anyone. Neochartalists fail to understand why such a thing happens from a monetary theory/finance perspective.

The idea that some governments have to necessarily issue debt in foreign currency comes as counterintuitive but the alternative is shutting down of the foreign exchange markets and economic activity with the rest of the world. When the exchange rate is falling, the government must sell foreign exchange to stabilise. Like buying foreign exchange has an depreciating effect on the currency, selling has the reverse. The sale of foreign exchange shifts foreigners’ portfolio from assets held in the domestic currency to assets held in foreign currency, bringing about a reduction in order flows to sell. But the amount of foreign exchange to be sold can be large. And the above illustrates how governments/central banks would need to obtain foreign currency to sell and in the process become indebted in foreign currency. It’s as simple as that!

Of course the government/central bank can also obtain foreign exchange from purchases in the foreign exchange markets, when exports are high compared to imports, and build reserves this way without affecting the exchange rate too much and many countries’ governments do that, but it’s not always possible as exports depends on competitiveness in world markets and general demand conditions.

Ronald McKinnon—although a neoclassical economist—understood this problem and had a fine description of problems governments face because of the foreign exchange market in his paper Money And Finance On The Periphery Of The International Dollar Standard, published in 2002. See Section 6 on various options available via fixing or floating exchange rates and banking/finance regulation and limitations. You need to filter out the wrong stuff to extract the good parts!

So blaming the government for having government debt in foreign currency isn’t helpful. It’s just like neoclassical economics: the theory goes wrong, blame the actors instead of wondering if your theory might be wrong.

Neochartalists (“MMTers”) On Turkey

In recent days, the Turkish Lira ₺ has been depreciating a lot. In fact, the President ordered interest rate cuts as he thought it would stop the crash but that made the problem worse. The central bank has sold foreign reserves to try to stop the fall but it doesn’t have enough reserves.

For now, I just wanted to record a ridiculous proposal by Warren Mosler to cut the policy rate to zero, something he has been advocating for every country with floating exchange rate since forever.

On August 31st this year, he tweeted:

I’ve proposed that Turkey cut the policy rate to 0 to reduce inflation and firm the lira.

Randall Wray, in a chapter What A Long, Strange Trip It’s Been: Can We Muddle Through Without Fiscal Policy? in the book Post-Keynesian Principles of Economic Policy written in 2006 made this claim:

… for such a country [a sovereign nation with a floating currency] (even Turkey), both a budget deficit and a current account deficit are indefinitely sustainable.

Clearly, the neochartalists should accept the shortcomings in their theory. There’s a good literature in Post-Keynesian theory about external constraints.

Neochartalists start with a wrong claim “imports are a benefit, exports a cost”. In that they make it look like mainstream theory is for restriction of international trade whereas in reality it’s just the opposite. By starting completely wrong, they reach the most ridiculous of conclusions. Turkey has to improve its balance of payments and international investment position by improving its trade balance. Zero interest rate won’t help.

Ramesh Chandra On Nicholas Kaldor And Circular Cumulative Causation

Ramesh Chandra has a recently released book Endogenous Growth In Historical Perspective: From Adam Smith To Paul Romer, and one of his chapters is on Nicholas Kaldor and circular and cumulative causation.

Chandra’s own views are different but I thought his description of Gunnar Myrdal and Nicholas Kaldor’s insights was amazing with the most appropriate quotes like the following (from page 201 in print/209 in pdf):

Gunnar Myrdal (1956, 1957) and Nicholas Kaldor (1978), on the other hand, argued that because of the operation of circular cumulative causation free trade led to interregional and international inequalities. Myrdal (1956) maintained that “if left to its own course, economic development is a process of circular and cumulative causation which tends to award its favours to those who are already well endowed and even to thwart the effort of those who happen to live in regions that are lagging behind” (quoted from Meier 1989, p. 385). Further, “on the international as well as national level trade does not by itself necessarily work for equality. A widening of markets strengthens often on the first hand the progressive countries whose manufacturing industries have the lead and are already fortified in surroundings of external economies, while the underdeveloped countries are in continuous danger of seeing even what they have of industry and, in particular, their small scale industry and handicrafts outcompeted by cheap imports from industrial countries, if they do not protect them” (ibid., p. 385). International trade does promote primary exports from developing countries but here they face adverse demand conditions or inelastic demand in world markets. Any technological improvements which reduce primary goods prices benefit the importing countries. Thus, “forces in the markets will in a cumulative way tend to cause even greater international inequalities between countries as to their level of economic development and average national income per capita” (ibid., p. 385).

Likewise, Kaldor (1978), in his paper “Nemesis of free trade”, thought that free trade may be good under constant costs but under increasing returns it benefitted some countries (or regions) at the cost impoverishment of others. He agreed with Myrdal that international trade perpetuated international inequalities, and developing countries would do well if they industrialized behind tariff and quantitative restrictions. Kaldor also stated that protectionism was good not only for developing countries but also for a developed country like Britain. In the initial stages of her growth, free trade suited Britain. But after Germany, France, USA, and Japan industrialized, Britain could not compete and one market after another became closed. Had Britain not been ideologically wedded to free trade, her living standards would have been much better.

References

Kaldor, Nicholas. 1978. Nemesis of free trade. In Further Essays on Applied Economics. London: Duckworth.

Meier, Gerald M. 1989. Leading Issues in Economic Development. Oxford and New York: Oxford University Press.

Myrdal, Gunnar. 1956. Development and Underdevelopment. Cairo: National Bank of Egypt Fiftieth Commemoration Lectures.

Myrdal, Gunnar. 1957. Economic Theory and Underdeveloped Regions. London: Gerald Duckworth

The 2021 Nobel Prize, And Michał Kalecki On The Positive Effects Of Rise In Wages On Employment

The Nobel Prize in economics this year was given in one half to David Card for his work for showing using “natural experiments” that “that increasing the minimum wage does not necessarily lead to fewer jobs”.

The profession has taken so much time to accept this. Also, many have pointed out that it’s not accurate and the prize press release itself indicates that it is for the experimental methodology and not much for the result.

At any rate, it is ridiculous that such a thing was known in the 1930s: Michał Kalecki wrote on it. The idea that increasing wages raises unemployment is an old dogma and so proving it wrong as some “credibility revolution” (as many economists claim) is a bit ridiculous.

Anyways, the point of my post is to highlight how Michał Kalecki had not only argued that increasing wages does not necessary have a negative effect, he went on to argue that it has a positive effect. He was arguing for wages in general, not just about a law on minimum wage, but the ideas are obviously similar: wages in general or the minimum wage.

The following are two quotes from 1939 and 1971 respectively. Correct me if I am wrong if someone had said this before him.

In Essays In The Theory Of Economic Fluctuations, 1939 in Collected Works Of Michał Kalecki, Vol. I:

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.

In Class Struggle And The Distribution Of National Income, in Collected Works Of Michal Kalecki, Volume II. Capitalism: Economic Dynamics:

… a wage rise showing an increase in the power of the trade unions leads-contrary to the precepts of classical economics-to an increase in employment. Conversely, a fall in wages showing a weakening in their bargaining power leads to a decline in employment. The weakness of trade unions in a depression manifested in permitting wage cuts contributes to the deepening of unemployment rather than to relieving it.

If you find any quotes before these dates, please let me now. Could be from Michał Kalecki himself!

OECD’s ‘Understanding Financial Accounts’ On The Importance Of Stock-Flow Coherent Models

International organisations such as the UN, IMF, OECD etc., publish some good guides on national accounts and the flow of funds. I just noticed that the 2017 edition of OECD’s book ‘Understanding Financial Accounts’ has a section in appreciation of stock-flow coherent (SFC) models with a history starting with the work of Morris Copeland.

From page 407-409:

  1. Uses of financial accounts and balance sheets in economic research

Financial accounts were first modelled by Morris A. Copeland …

The fall of financial accounts and balance sheets and the work of Godley

In the 1960s and the 1970s financial accounts were at the centre of economic analysis. From the mid-1980s until the 2007-09 economic and financial crisis, interest in financial accounts and balance sheets more or less vanished, for a number of reasons: a growing focus on the micro-economic foundations of macroeconomics; the increasing role of monetary and credit aggregates for the conduct of monetary policy that implied a lower focus on the entire financial system; trust in the self-correcting market mechanism through price adjustments, while considering quantities – both flows and stocks – less important; the rational expectation critique of Keynesian models; a growing inclination among economists to separate monetary and real phenomena; and the problems of achieving full international harmonisation of statistics until the introduction of the 1993 System of National Accounts (SNA93).

In contrast, Wynne Godley never abandoned the idea that economic models should be founded on flows and stocks, and developed consistent models of the US economy and other countries. In his approach, modern economies have an institutional structure comprising (non-financial) enterprises, banks, governments and households. The evolution of economies through time is dependent on the way these agents take decisions and interact with one another (Godley and Lavoie [2007]) …

References

Godley, W. and M. Lavoie (2007), Monetary Economics: An Integrated Approach to Money, Credit, Income, Production and Wealth, Palgrave MacMillan, Basingstoke.

Link

Marc Lavoie’s Lecture On Policy Response To The Pandemic From A Post-Keynesian Perspective

There’s a lecture (on Zoom) by Marc Lavoie hosted by Department of Economics at Kyungpook National University, from January this year which I only found recently.

The lecture is on some aspects of policies such as fiscal policy, large scale asset purchases by central banks (LSAP, or “QE”) during the pandemic and some comments on neochartalism or “MMT”. Basically distinguishing PKE and neochartalism.

Enjoy!