Anthony Thirlwall’s Lecture At Kaldor Conference

There was a conference in honour of Nicholas Kaldor on 30th September last year at the Cornivus University in Budapest, Hungary 🇭🇺. Kaldor was born in Budapest. Anthony Thirlwall gave the keynote lecture at the conference. The video has been made available now.

click to see the video on YouTube


Thomas Palley — Fixing The Euro’s Original Sins: The Monetary – Fiscal Architecture And Monetary Policy Conduct

Thomas Palley’s new paper:

The euro zone (EZ) was created in January 1999. Its weak economic performance is significantly due to the euro’s neoliberal monetary architecture and the design of monetary policy. Those features undermine national political sovereignty and consign the EZ to severe economic under-performance, which in turn fosters political demands for exit from the euro. Escaping this dynamic requires restoring fiscal space to EZ countries, and also changing the design of EZ monetary policy. The paper shows how this can be done. It decomposes the challenge of reform into generic problems related to the neoliberal construction of monetary policy, and specific problems concerning the euro as a currency union. The currency union problems are further decomposed into “money – fiscal policy” architecture problems and specific monetary policy conduct problems.

[The title is the link]

Article 50 To Be Triggered. Nicky Kaldor Would Have Been Happy

The UK Prime Minister’s Twitter account tweeted this picture of Theresa May signing the letter to trigger Article 50 tomorrow, starting the process for the UK 🇬🇧 to leave the EU 🇪🇺.

click the picture to see the Tweet on Twitter

Nicholas Kaldor wrote a lot on this in the 1970s before the United Kingdom European Communities membership referendum in 1975. In his Collected Economics Essays, Volume 7, he wrote (Introduction, page xxvi, October 1977) :

The final section of this volume, Part III, reproduces papers written in the course of the “Great Debate” on the question of British Membership of the Common Market in 1970 and 1971, and includes as a postscript a lecture on Free Trade written in 1977. As this debate came to an end when Britain entered the market, a decision which was later confirmed in popular referendum with a 2:1 majority, the reproduction of these papers may strike as otiose and serving little purpose other than somewhat ignoble one of self-vindication in the eyes of future historians. However, if the long-run effects of our membership turn out to be as disastrous as I feared they would be in 1971—and nothing that has happened has caused me to change my views—I think it is of the utmost importance that the true arguments against membership should be accessible to successive generations of students, the more so since the political debate continues to be dominated by issues (such as our effects of membership on the cost of food, on our agriculture, or the net budgetary cost of membership) which I regard as secondary and which could be brushed aside if the long-run effects on Britain’s manufacturing industry and on our capacity to provide employment were favourable.


So Nicky Kaldor would have been happy, had he been alive today.

Economists’ predictions about leaving the European Union (“Brexit”) went wrong. Real GDP in the H2 2016 rose faster than H1, while they were predicting a recession. Not that the road will be simple ahead for Britain. Let’s see!

Robots, Globalization, Unemployment, Etc

Worker: I am losing my job because of globalization.

Economist: No, you are losing it because of automation.

[Plus calling them ‘losers’, such as by saying, “losers of globalization should be compensated”]

This is not just unhelpful but wrong too! Actually, saying it is wrong is underplaying it. It’s okay to be wrong sometimes—everyone is wrong sometimes—but how bad can getting it precisely the opposite every time? Anyone throwing darts at the dartboard can hit the bulls eye by fluke but what is it like throwing darts in the opposite direction?

Economists should be more modest and remind themselves of what Keynes said about workers in The General Theory:

… workers, though unconsciously, are instinctively more reasonable economists than the classical school

There is some irony to all this. Economists have played down the notion of technological unemployment. If production is constant and productivity rises, there’s a fall in employment because less labour is required to produce the same output. So output has to rise to keep employment from falling because of “automation”. In Post-Keynesian economics, the principle of effective demand matters both in the short run and the long run. So technological unemployment is a real possibility. New Consensus economists concede that John Maynard Keynes rules in the short run but assume that Jean-Baptiste Say rules in the long run. The irony hence is that New Consensus economists seem to show worry about automation these days.

In my opinion, this is because the sacred tenet of free trade must be defended by economists at all costs. So they make a concession about loss of employment to robots. Unfortunately that’s not right either. Globalization—both because of competition by international producers and offshoring of jobs via global supply chains—has led to the loss of livelihood for many in the Western world.

Political parties with fascistic tendencies have noticed this huge error at the heart of the New Consensus economics and the liberal political parties to whom these economists advise. They have understood that by pointing out that globalization—under the current rules of the game—can destroy jobs. They have seen support from people. It’s true that the political movement is not likely to deliver much but at the same time, liberal leaning political parties should try to understand this to regain lost ground.

Instead, we see writing such as The Productivity Paradox by Ryan Avent of The Economist. It’s only a paradox if you view it using the lens of the New Consensus Economics. He himself seems to appreciate others’ claims that:

the robot threat is totally overblown: the fantasy, perhaps, of a bubble-mad Silicon Valley — or an effort to distract from workers’ real problems, trade and excessive corporate power.

Not sure why the Silicon Valley gets the blame, and not economists themselves, but anyway, that is some conceding.

Remember the concept of technological unemployment is a race condition.

If productivity rises a lot and demand not much, we have unemployment. If the latter rises fast, we have more employment.

In fact productivity rises in the Western world has been quite low recently and we should embrace robots. This is because measured productivity is likely to rise if output rises. Productivity rise (as per the Kaldor-Verdoon Law) is due to two things: an exogenous component and an endogenous component which depends on the rise in output. Also, remember Keynes talked of autonomous and induced expenditures as component of effective demand, which drives output. So if governments around the world design policy in which demand rises fast, then “automation” can not just be welcomed, it will be a cause of it, i.e., higher production leading to more automation because of learning-by-doing. But economists will continue to get it backward!

Kalecki. Geniusz Zapomniany

h/t Matias Vernengo, I came across this nice short documentary Kalecki. Geniusz Zapomniany (Kalecki: Forgotten Genius) on the life of the Polish 🇵🇱 economist Michal Kalecki.

Michal Kalecki with India’s first Prime Minister Jawaharlal Nehru. Click the picture to see the documentary in a new tab. 

I also came across this nice article by Marc Lavoie, Kalecki And Post-Keynesian Economics, in the book, Michał Kalecki In the 21st Century, edited by Jan Toporowski and Łukasz Mamica and published in 2015. Toporowski also appears in the documentary above.

In that article Marc Lavoie says that although the work of Kalecki is “extensive and paramount”, some Post-Keynesian authors have been reluctant to accept it. Marc Lavoie argues that it ought to not be that way and that “some post-Keynesians believe that Kalecki, rather than Keynes, provides the best foundations for post-Keynesian theory”.

The importance of national accounts and flow of funds is underemphasized by economists. It’s as crucial as calculus and real analysis is to physics. Economists confound income flows with financial flows, but matters of national accounts were kindergarten stuff for Kalecki. With such advantage, Kalecki made a huge amount of progress in his work on economic dynamics.

Noah Smith On Free Trade

In an article The Man Who Made Us See That Trade Isn’t Always Free for Bloomberg View, Noah Smith says this about David Autor:

So, I asked, how should trade policy be changed? Autor’s answers again surprised me. He suggested that the process of admitting China to the World Trade Organization back in 2000 should have been slowed down significantly. That would have given American workers and industries time to prepare for, and adjust to, China’s competitive onslaught.

He told me that the U.S. government should focus attention on manufacturing industries, and even use industrial policy to bolster the sector.

Traditionally, economists have looked down their noses at “manufacturing fetishism,” but Autor says he thinks the sector is underrated.

Of course, heterodox economists have known this for long. As Nicholas Kaldor said in his 1980 articleFoundations And Implications Of Free Trade Theory, written in Unemployment In Western Countries (probably my most favourite quote in this blog):

Owing to increasing returns in processing activities (in manufactures) success breeds further success and failure begets more failure. Another Swedish economist, Gunnar Myrdal called this’the principle of circular and cumulative causation’.

It is as a result of this that free trade in the field of manfactured goods led to the concentration of manufacturing production in certain areas – to a ‘polarization process’ which inhibits the growth of such activities in some areas and concentrates them on others.

Of course Smith saying all this isn’t exactly heresy as economists are known to make mea culpa all the time and then backtrack. Nonetheless, this article is still revealing. Smith also talks of the importance of empirical work. In heterodox literature, there is of course the work of Anthony Thirlwall, John McCombie and others. See Models Of Balance of Payments Constrained Growth: History, Theory And Empirical EvidenceSoukiazis, E., Cerqueira, P. (Eds.).

There’s also evidence from Ricardo Hausmann and César A. Hidalgo of Harvard University. See this Nature article.

John McCombie in the above quoted book, Models of Balance Of Payments Constrained Growth, in his chapter, Criticisms and Defences Of The Balance Of Payments Constrained Growth Model: Some Old, Some New, recognizes the work of Hausmann, Hidalogo, et al. :

Hausmann et al., (2007) have also stressed the importance of the sophistication of a country’s exports for its rate of output growth. They measure the sophistication of a particular export in terms of an index of the weighted per capita income of the countries that export that good, where the weights correspond to the revealed comparative advantage of the countries producing that good (PRODY). Then the average productivity of a country’s export basket is measured using this productivity index together with the relative shares of exports of the country concerned (EXPY). They found that EXPY was a statistically significant explanatory variable of per capita GDP growth in a regression which also included control variables.

These theoretical and empirical works go so much against the economist case for free trade, the most sacred tenet in economics.

Immigration And Wages

In recent times, there has been a large rise in refugees. This has fueled the debate on migration—both about economic migration and on people seeking refuge in the West because of political turmoil in their home countries.

As is true with most issues, there’s a conflation. Of course, the latter is non-negotiable. Article 33. – Prohibition of expulsion or return (“refoulement”) of the United Nations’ Human Rights’ Convention relating to the Status of Refugees is clear about this:

  1. No Contracting State shall expel or return (” refouler “) a refugee in any manner whatsoever to the frontiers of territories where his life or freedom would be threatened on account of his race, religion, nationality, membership of a particular social group or political opinion.

So refusing refugees is both immoral and illegal.

But that still leaves a debate about economic migration. But in public debates, either people argue for “open borders” or we have xenophobic, far-right kind of arguments.

Heterodox economists such as Ha-Joon Chang argue for migration controls, who sees it as a policy for cheap labour and keeping wages low.

Now Simon Wren-Lewis thinks that it’s incorrect. On his blog he says:

[the liberal left] gets to love immigration controls and can begin again to represent the part of working class that dislikes immigration.

The reasoning is attractive. Starve firms of cheap labour, and they are forced to innovate and invest in labour saving machinery and/or in training their workers, which drives up productivity and real wages. In a world where capital is not mobile, that mechanism could work over a very long time period. But when capital is mobile, the firm has an obvious alternative: produce somewhere else where labour is cheaper. Keynes taught us not to make the mistake of assuming output was fixed, and the same is true here. Labour shortages could equally lead to less production, more imports, and a depreciation that makes everyone poorer.

The mechanism on how immigration controls work is simpler than that. There’s no need for labour-saving machinery. Instead because immigration controls put workers in a better bargaining position, it raises wages (as the Phillips curve tells us). Higher wages means higher domestic demand and hence higher output. It’s possible that some firms may shift production abroad but an economic policy which favours immigration controls also likely favours “reshoring”, i.e., bringing jobs back. In many cases—such as restaurant staff—it is not even true that jobs can be offshored. Plus why assume that non-immigrants are less productive?

It’s true—as Simon Wren-Lewis says—that output shouldn’t be assumed to be fixed, as Keynes taught us, but he also seems to miss the Kaleckian dynamics that wage rises will lead to higher output.

Of course, migration can be beneficial. But there’s conflation here too. It’s myth making to say that “immigrants aren’t taking jobs Americans don’t want to do”. But high-skill migration can be highly beneficial. This is because fortunes of nations depend critically on the competitiveness of their producers and firms are finally people. So attracting high-skill talent is beneficial for any nation. So debates and policies on immigration needs to be more nuanced.

There has been a rise in the rejection of the “center-left” globally coincident with the rise in right-wing populism. The center-left has shifted to neoliberalism instead of caring for the working class. Right-wing parties sensed an opportunity. As the blurb of a recent articleThe Ruthlessly Effective Rebranding Of Europe’s New Far Right by Sasha Polakow-Suransky for The Guardian, says:

Across the continent, rightwing populist parties have seized control of the political conversation. How have they done it? By stealing the language, causes and voters of the traditional left

Macroeconomics and political economy are now more important that ever. To get back the control of the populist parties, economic myth-making needs to go.

Francis Cripps And Marc Lavoie’s Short Biography Of Wynne Godley

There’s a new bookThe Palgrave Companion To Cambridge Economics which features among other things biographies of Wynne Godley, Joan Robinson and Nicholas Kaldor and other notable Cambridge economists. Wynne Godley’s biography—Wynne Godley (1926-2010)—is by his closest collaborators – Francis Cripps and Marc Lavoie (pp. 929-953)

You can access the book on Springer, if you have subscription or preview it on Google Books.


One interpretation of Godley’s theoretical work is that it is a quest for the Holy Grail of Keynesianism. Keynesians of all stripes had for a long time mentioned the need to integrate the real and the monetary sides of economics. Integration was all the talk, but for a long time, little seemed to be achieved … The main purpose of the Godley and Cripps’s 1983 book is to amalgamate the real and the financial sides, providing a theory of real output in a monetary economy …

Godley believed that Keynesian orthodoxy ‘did not properly incorporate money and other financial variables’ (ibid.: 15). Godley and Cripps and their colleagues ‘found quite early on that there was indeed something deficient in most macroeconomic models of the time’, including their own, ‘in that they tended to ignore constraints which adjustments of money and other financial assets impose on the economic system as a whole’ (ibid.: 16). Interestingly, Godley was aware of the work being carried out at about the same time by Tobin and his Yale colleagues, as well as by others such as Buiter, Christ, Ott and Ott, Turnovsky, and Blinder and Solow, who emphasized, as Godley and Cripps (ibid.: 18) did, that ‘money stocks and flows must satisfy accounting identities in individual budgets and in an economy as a whole’. Still, Godley thought that the analysis of the authors in this tradition was overly complicated, in particular because they assumed some given stock or growth rate of money, ‘leaving an endogenous rate of interest to reconcile’ this stock of money with the fiscal stance (Godley 1983: 137). Godley and Cripps (ibid.: 15) were also annoyed by several of the behavioural hypotheses found in the work of these more orthodox Keynesians, as they ‘could only give vague and complicated answers to simple questions like how money is created and what functions it fulfils’. The Cambridge authors thus wanted to start from scratch, with their own way of integrating the real and the financial sides, thus avoiding these ‘tormented replies’ (ibid.) …

Ultimately, Godley’s desire to present a definitive treatise based on consistent macroeconomic accounting gave rise, nearly 25 years later, to the Monetary Economics book (Godley and Lavoie 2007a) …


The FRED Blog On Unemployment

Federal Reserve Bank of St. Louis has a good explainer on the different unemployment rates. (Click the header for the link).

These nuances have become more important than before as Donald Trump has frequently suggested that the unemployment rate is fake. While Trump overstates his case, it’s also true that the headline unemployment rate is misleading.

In addition, during and after the crisis, the civilian participation rate dropped. 

In the above chart, which is the inverse of the labour participation rate, the fraction of the population not in the workforce is shown. As the blog explains, it comprises of:

Principally, these are retirees, students, people with various handicaps, people who dropped out of the labor force, and people who do not want to work

Of course, there’s a thin line between people who are discouraged to work and people included above. As you can see from the chart above, the fall in the participation rate has been coincident with the crisis and raises the question if the unemployment rates sufficiently capture true unemployment. It is difficult to believe that this is entirely due to demographics.

So it’s important to keep these things in mind when discussing politics. Neither believe a nationalist, nor a neoliberal.


FRED Graph: US 🇺🇸 Sectoral Balances

Tracking the sectoral balances of a nation’s economy is a great way to build a narrative about its economic dynamics. It’s true, that an accounting identity doesn’t say much about causation. But they hint it and if we have a behavioural model around it, then we learn a lot more. It was used by Wynne Godley to highlight the predicament on the horizon in the 2000s.

The Federal Reserve Bank of St. Louis has a nice website FRED where you can create charts and even observe them when new data gets updated. Below is the U.S. sectoral balances chart. This is a static image file. For the dynamic chart, track the link above (the header of this page).

The blue line is the private sector net lending—its income less expenditure— which was in deficit and led to the crisis. The red line is the government’s deficit and the green line is the current account balance of international payments.