Tag Archives: marc lavoie

Marc Lavoie On The Shortcomings Of The Profit Inflation Theory

Marc Lavoie has an article, Some Controversies In The Causes Of The Post-Pandemic Inflation at the  blog, Monetary Policy Institute Blog.

From the article:

In the post-Keynesian tradition, firms usually operate in an area where marginal costs, or unit direct costs, are constant. Taking into account overhead labour costs and other fixed costs, unit costs are thus decreasing up to full capacity. This means that with a given markup rate over unit direct costs (or with a given markup rate over normal unit costs), profits will be rising for two reasons … First, as firms produce and sell more units, their unit cost drops, and hence their realized profit per unit gets bigger, and secondly since they sell more units, they will make more profits.

A lot of heterodox authors have endorsed the profit inflation theory and there are even research reports from the Wall Street claiming the same! But according to Marc Lavoie’s argument they just explain it in only some industries like the oil industry.

Marc Lavoie On Recent Controversies On Inflation

There’s a new talk (from 22nd February) by Marc Lavoie (available on YouTube) on the recent controversies on relatively high inflation in recent times in North America.

Marc had already talked on this before.

Profits vs profits margins vs costing margins.

The above screenshot summarises Marc Lavoie’s points. The discussion appears around 16:00 in the video.

Lots of left-leaning economists have claimed the idea of profits being the source of high inflation. An example is a recent paper by Isabella Weber (and Evan Wasner) who claim that under conditions of supply constraints, firms can hike prices.

Link

Ashwani Saith Discusses His Book Cambridge Economics In The Post-Keynesian Era: The Eclipse Of Heterodox Traditions

There’s a webinar for the Review Of Political Economy where Ashwani Saith discusses his new book on Cambridge economics, hosted by Louis-Philippe Rochon and with discussion from Francis Cripps, Marc Lavoie and Maria Cristina Marcuzzo.

The event was held on Feb 2, 2023.

[The title is the link to the video on YouTube]

Ashwani Saith’s New Book — Cambridge Economics In The Post-Keynesian Era: The Eclipse Of Heterodox Traditions

Ashwani Saith’s new book is out. It’s the history of how Post-Keynesianism was dethroned at Cambridge through power and influence of neoliberalism.

Wynne Godley is on the cover!

From the book’s description of the cover:

COVER

St Michael’s victory over the devil.
Jacob Epstein, Coventry Cathedral

On 14–15 November 1940, “a bright moonlit cloudless night made navigation simple” for the Luftwaffe operation—fatefully code-named Moonlight Sonata—of the blanket bombing of Coventry in which “almost a third of the city was fattened” with its medieval cathedral reduced to rubble. (GCHQ 2021). Wynne Godley was married to Kitty Garman, daughter of Kathleen Garman and the famous sculptor Jacob Epstein, one of whose creations lives on the wall of the cathedral in Coventry evoking the unbroken spirit of the city, with Benjamin Britten composing his War Requiem for the consecration of the reconstructed cathedral in 1962. It depicts St Michael—representing the good—slaying the devil. Epstein used a model of his “impossibly handsome” son-in-law, Wynne, to sculpt the head of St Michael. Though Wynne and his research team, along with other celebrated heterodox lineages, lost out proverbially to “the devil” in the Cambridge war of economics, there has subsequently been a defiant phoenix-like revival of the reputation and work of the famous Godley-Cripps Cambridge Economic Policy Group of the 1970s, as well as of other renowned radical traditions nurtured since the 1920s in Cambridge, the crucible of heterodox economics. The allegorical symbolism of Sir Jacob Epstein’s sculpture resonates with the leitmotif of the book.

Here’s Marc Lavoie’s review:

Ashwani Saith’s book is monumental, enthralling, beautifully written with its occasional satirical tone, but as we are being warned, depressing. It explains how the Faculty of Economics of the University of Cambridge—the world centre of post-Keynesian economics—was gradually and entirely taken over by neoclassical economics and why the Department of Applied Economics, also at the heart of heterodox economics, eventually came to be dismantled. This was so far an untold story, except for a chapter on ‘Faculty wars’ in Saith’s previous book, the intellectual biography of Ajit Singh. The current book provides 14 chapters of a meticulous detective story, relying mostly on Cambridge archives, but also on testimonies, interviews, emails, and previous articles of participants to these events. The book makes clear that, besides possible strategical mistakes by the incumbent heterodox economists, there were inexorable and ineluctable outside forces that led to this dismal state of affairs, through the Americanization of the economics profession and through the changing political winds that blew out heterodox and left-wing economics nearly everywhere in the world. The last chapter shows that all is not lost, both in Cambridge and elsewhere in the world.

REFERENCES

GCHQ. (2021, April 19). The bombing of Coventry in WWII. Retrieved December 19, 2021, from https://www.gchq.gov.uk/information/the-bombing-of-coventry-in-wwii

The book is 1217 pages long.

Word count of “Kaldor” and “Godley”: 428 and 512 respectively.

Link

Marc Lavoie And Matias Vernengo — Thinking About Inflation

There were two talks on inflation in recent times by Marc Lavoie and Matias Vernengo on September 16th at the Fields Institute For Research In Mathematical Sciences in Canada.

Both authors highlight the shortcomings of orthodox explanations of the recent spike in inflation: the monetarist argument about expansion of the balance sheet of central banks, wage-price spiral, rise in demand etc. They also critique the argument about firms raising their markups and becoming more greedy, which many on the left seem to be putting forward. In their opinion—which I also agree with—it is mainly because of supply chains.

[The title is the link to the video]

RIP, Lance Taylor

Lance Taylor has passed away.

Among other things, he promoted stock-flow consistent modeling. He had a book Reconstructing Macroeconomics.

I hold dear the review of Lance Taylor of Wynne Godley’s work, titled: A Foxy Hedgehog: Wynne Godley And Macroeconomic Modelling.

The article starts:

The fox knows many things, but the hedgehog knows one big thing (Archilochus, seventh century BCE).

Lance Taylor clearly understood the importance of accounting. In the paper A Simple Model Of Three Economies With Two Currencies, Wynne Godley and Marc Lavoie quote him:

As pointed out by Taylor (2004, p. 206), ‘the best way to attack a problem in economics is to make sure the accounting is right’.

Bibliography

Taylor, L. 2004. Exchange rate interderminacy in portfolio balance, Mundell–Fleming and
uncovered interest rate parity models, Cambridge Journal of Economics, vol. 28, no. 2, 205–27

Here’s the link to that Lance Taylor paper.

Marc Lavoie On The Euro Area And Neochartalism

Marc Lavoie has a new paper MMT, Sovereign Currencies And The Eurozone. It’s based on a lecture he was asked to give in 2021 STOREP conference. In this he analyses what neochartalism (“MMT”) is and what is says about the Euro Area.

Marc Lavoie also discusses Sergio Cesaratto’s work. Sergio had an excellent book Heterodox Challenges In Economics: Theoretical Issues And The Crisis Of The Eurozone and I somehow missed Marc’s review of it earlier.

My view on these issues—with good grasp of the institutional details—is that countries face a balance-of-payments constraint and the way the Euro Area is set up makes the balance-of-payments constraint stronger. Euro Area countries can no longer devalue their currencies (or hope their currencies depreciate by market forces) and the government can’t make overdrafts on their central banks.

It’s true that the European Central Bank (ECB) can buy government bonds but that it can doesn’t mean it actually will do to the extent needed. Indeed, the ECB has also pushed for tightening of fiscal policy using its powers. Countries face a BOP problem because like in other institutional setups, they’re at the mercy of foreigners. In fact more it’s more than otherwise in case of the Euro Area. And international indebtedness ultimately falls on the shoulders of the governments and hence we saw crisis in the government bond markets.

Countries with a strong international investment position such as Germany do not face this problem.

Ultimately, the problem is that the Euro Area doesn’t have a central government which would be involved in large fiscal transfers and keeping imbalances between countries in check. But as Sergio Cesaratto argues, it was never meant to be that way as the founders of the Euro Area designed it in a way to take away powers from national governments.

I should add one question which arises: the question about the political role of the ECB, which is similar to the role of governments in other places such as the US. There seems to be an inconsistency in the position of people such as Sergio (and I) that we treat the ECB and the US government differently. We say that the US government should be involved in more fiscal stimulus but don’t exactly say that the problems of the Euro Area can be resolved by proposing that the ECB promises to purchase government bonds without limits.

The answer to that is: even outside the Euro Area, rich countries’ central banks can bail out poor countries facing balance-of-payments financing problems. Does that mean that countries outside the Euro Area don’t face a bop-constraint??

It’s a rhetorical question posed as an answer.

Ultimately the balance-of-payments problems in the Euro Area is more severe than otherwise.

Where does neochartalism (“MMT” or “M.M.T.”) fit in my description? The idea that Euro Area governments cannot make overdrafts at their national central banks (NCBs) is something stressed by neochartalists is right but many authors who didn’t call themselves MMTers stressed this such as Wynne Godley in 1992. The idea that current account deficits don’t matter isn’t useful as you still have to explain why Germany didn’t go into a crisis like Greece.

Wynne Godley Vs. The Mundell-Fleming Model

In mainstream economics, the Mundell-Fleming model is central. It’s however wrong to the core!

As early as 1978, Wynne Godley in a paper “New Cambridge” Macroeconomics And Global Monetarism: Some Issues In The Conduct Of U.K. Economic Policy (with Martin Fetherston) had a model with the compensation thesis which is contrary to the neoclassical model. As per Marc Lavoie’s paper Wynne Godley’s Monetary Circuit, where he also refers to the paper, according to the compensation thesis:

central banks set a target interest rate and supply bank reserves and cash on demand. Thus, if there is an increase in the amount of foreign reserves held by the central bank on the asset side of its balance sheet, so as to keep the overnight interbank rate on target this will be compensated on the asset side of the balance sheet of the central bank by either a decrease in the size of the advances provided to domestic banks or a decrease in the amount of government securities held by the central bank. As a third possible compensatory mechanism, the central bank may instead issue central bank bills on its liability side.

Marc Lavoie and Wynne Godley, Levy Institute, 2002. Picture via Marc Lavoie’s site.

Marc Lavoie — Godley Versus Tobin On Monetary Matters

The fourth Godley-Tobin lecture was by Marc Lavoie on February 2021. The video of the talk is on YouTube.

There is now a paper by the same title published with ROKE (Review Of Keynesian Economics).

It’s interesting how James Tobin had a lot of things right but yet his model has a lot of neoclassical economics.

In the paper Marc Lavoie argues how Tobin seems to get a lot of things right but those were just weapons for criticisms of extreme views such as of Friedman. Tobin didn’t actually believe in them. Wynne Godley’s models are quite successful in escaping old ideas, if you remember the ending line of the preface of the GT.

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.