Heterodox Macroeconomic Theories

P. Chen, C. Chiarella, P. Flaschel, W. Semmler: Keynesian Dynamics and the Wage-Price Spiral. Estimating and Analyzing a Baseline Disequilibrium Approach. Society for Computational Economics, Computing in Economics and Finance No. 211, 2005. • Reformulation of the theoretical baseline DAS-AD model of Asada, Chen, Chiarella and Flaschel (2004) to allow for its somewhat simplified empirical estimation • the model now exhibits a Taylor interest rate rule in the place of an LM curve and a dynamic IS curve and dynamic employment adjustment • it is based on sticky wages and prices, perfect foresight of current inflation rates and adaptive expectations concerning the inflation climate • it exhibits typical Keynesian feedback structures with asymptotic stability of its steady state for low adjustment speeds and with cyclical loss of stability (Hopf bifurcations) with sufficiently large adjustment speeds • the dynamics is strongly convergent around the steady state, but will loose this feature if the inflationary climate variable adjusts sufficiently fast • support for the orthodox view that (somewhat restricted) money wage flexibility is the most important stabilizer in this framework, while monetary policy should allow for sufficient steady state inflation in order to avoid stability problems where wages are still not very flexible in a downward direction

C.R. Proaño, P. Flaschel, E. Ernst, W. Semmler: Disequilibrium Macroeconomic Dynamics, Income Distribution and Wage-Price Phillips Curves. IMK Working Paper, Nr. 4/2006. • Formulation of a disequilibrium AS-AD model based on sticky wages and prices, perfect foresight of current inflation rates and adaptive expectations concerning the inflation climate in which the economy operates • the model consists of wage and price Phillips curves, a dynamic IS curve as well as a dynamic employment adjustment equation and a Taylor-rule-type interest rate law of motion • through instrumental variables GMM system estimation with aggregate time series data for the U.S. and the € area economies, the authors obtain structural parameter estimates which support the specification of their theoretical model and show the importance of the inflationary climate, as well as of the Blanchard-Katz error correction terms, and indirectly of income distribution, in the dynamics of wage and price inflation in the U.S. and the € area economies • a remarkable similarity in nearly all the estimated coefficients in the structural equations

P. Chen, C. Chiarella, P. Flaschel, W. Semmler: Keynesian Macrodynamics and the Phillips Curve. An Estimated Baseline Macromodel for the U.S. Economy. University of Technology, Sydney, Finance and Economics Working Paper No. 147, 2006. • A baseline disequilibrium AS-AD model empirically estimated with time series data for the US-economy • the model exhibits a Phillips-curve, a dynamic IS curve and a Taylor interest rate rule • it is based on sticky wages and prices, perfect foresight of current inflation rates and adaptive expectations concerning the inflation climate in which the economy operates • a version of Okun's law is used to link capacity utilization to employment • our proposed nonlinear 5D model of real market dynamics overcomes anomalies of the old Neoclassical synthesis and also the rational expectations methodology of the new Neoclassical Synthesis • it resembles New Keynesian macroeconomics but permits nonclearing of markets • it exhibits typical Keynesian feedback structures with asymptotic stability of its steady state for low adjustment speeds and with loss of stability (generally by way of Hopf bifurcations) when certain adjustment speeds are made sufficiently large • we provide system estimates of our model, for quarterly time series data of the U.S. economy 1965.1-2001.1, and study the stability features of the U.S. economy with respect to its various feedback channels from an empirical perspective • based on these estimates, which in particular imply that goods market dynamics are profit led, we find that the dynamics are strongly convergent around the steady state, if monetary policy is sufficiently active, but will lose this feature if the inflationary climate variable or the price inflation rate itself adjusts sufficiently fast • we also study to what extent more active interest rate feedback rules or downward wage rigidity can stabilize the dynamics in the large when the steady state is locally repelling • we study the economy's behavior due to faster adjustments • we find that monetary policy should allow for sufficient steady state inflation in order to avoid stability problems in areas of the phase space where wages are not flexible in a downward direction

P. Chen, A. Rezal, W. Semmler: Productivity and Unemployment in the Short and Long Run. Schwartz center for economic policy analysis, Working Paper 2007-8, 2007. • We disaggregate data on productivity growth into its short and long run component • we explore the effect of productivity growth and unemployment in the short and long run perspective • using maximum likelihood estimation (MLE), structural vector autoregression (SVAR) and non-parametric time-varying estimation, we show that in the short run productivity growth affects employment negatively and in the long run positively

M. Kato, D. Brasington, W. Semmler: Transitioning out of Poverty (abstract only). Society for Computational Economics, Computing in Economics and Finance No. 470, 2006. • The mechanism of inequality due to educational lock-in effects • heterogeneity in environment across groups surrounding individuals can lead to take-offs of individuals or can lead to substantial immobility concerning learning and building up skills • in this paper: a mechanism that can lead to educational and social lock-ins that can give rise to persistent inequality • the model becomes highly nonlinear and may give rise to thresholds and multiple attractors • lower attractor(s) are regarded as poverty traps and any path to the upper attractor(s) entails a take-off

E.J. Nell, M. Forstater (eds.): Reinventing Functional Finance: Transformational Growth and Full Employment (Gebundene Ausgabe). Outcome of a conference on "Functional Finance and Full Employment" at the New School for Social Research, New York, 1998. Edward Elgar Publ., 2003. 368 pages, 98,99€=27¢/page. • E.J. Nell: Transformational growth and functional finance • R.A. Musgrave, R.L. Heilbroner: Opening remarks • D. Colander: Functional finance, new classical economics and great-great grandsons • M. Forstater: Toward a new instrumental macroeconomics: Abba Lerner and Adolph Lowe on economic method, theory, history and policy • H.-M. Trautwein: Neisser's unorthodox quantity theory of money • P. Mehrling: Functional finance, past and present • R. Eisner: The NAIRU and fiscal and monetary policy for now and our future: some comments • L. Turgeon: The history of Abba Lerner's supply-side inflation • R.A. Musgrave: Functional finance and fiscal functions • J.S. Duesenberry: Are these trade-offs necessary? • L.R. Wray: Functional finance and US government budget surpluses in the new millenium • M. Forstater: Functional finance and full employment: lessons from Lerner for today • E.J. Nell: Anchors aweigh: from real to nominal money and from market to government stabilization • J. Smithin: Interest rates, profits and economic growth • D. Colander, J. Duesenberry, R. Eisner, M. Forstater, R.L. Heilbroner, R. Musgrave, E. Nell: Roundtable discussion • P.G. Berglund: Equality and enterprise: can functional finance offer a new historical compromise? • I.H. Rima: The operational role of functional finance for labor market behavior and outcomes • W.F. Mitchell: The job guarantee: full employment and price stability in a small open economy • E.J. Nell: Short-run macroeconomic stabilization by an employer of last resort • Transformational growth project members and conference participants in open conversation

M. Forstater: Functional Finance and Full Employment: Lessons from Lerner for Today? The Jerome Levy Institute of Bard College, Working Paper No. 272, 1999. • #1: full employment, price stability, and a decent standard of living for all are fundamental macroeconomic goals, and it is the responsibility of the state to promote their attainment • #2: policies should be judged on their ability to achieve the goals for which they are designed and not on any notion of whether they are "sound" or otherwise comply with the dogmas of traditional economics • Lerner's functional finance: the state has the ability to promote full employment and price stability and should use its powers to do so • #3: "money is a creature of the state" — the state has the power not only to tax, but to designate what will suffice to retire tax and other obligations (what it will accept at its pay offices) • #4: taxing is not a funding operation • taxation should not be made because the government needs to make money payments • #5: government borrowing is not a funding operation • it is questionable whether we should use the term "borrowing" — simply refer to bond sales • #6: the primary purpose of taxation is to influence the behavior of the public • #7: the primary purpose of government bond sales is to regulate the overnight interest rate (if otherwise the rate of interest would be too low) • #8: bond sales logically follow from, rather than precede, government spending • #9: "printing money" in and on itself has no impact on the economy whatsoever • there are 3 pairs of fiscal instruments: taxing and spending, buying and selling, and borrowing and lending — "printing money" is not independent of these • only if the money printed is spent on goods and services or lent through issuing bonds, will there be some economic impact • #10: without a full employment policy, society cannot benefit from labor-saving technological advance → efficiency becomes inefficient • #11: without a full employment policy, a country must suffer over its trade balance (which need not be worried about with a full employment policy) • exports are a cost, and imports are a benefit (obtaining goods for our use) • the idea that a country can cure unemployment only by an export surplus is baseless • #12: arguments that "the deficit and debt are not really as big as they look", or that "if we measure them differently or keep a capital account they are not really that bad", are counter-productive • #13: when there is unemployment, jobs and money (not resources and goods) are scarce • #14: functional finance is not a policy — it is a framework within which all sorts of policies may be conducted • functional finance advocates foremost that policy be based on an understanding of the monetary and financial system "in which we live" • #15: to achieve full employment, government spending may have to include direct job creation • traditional fiscal and monetary policies may be ineffective in achieving full employment — direct job creation may be necessary

W.F. Mitchell, W.B. Mosler: Fiscal Policy and the Job Guarantee. Australian National University, Centre for Economic Policy Research, Discussion Paper No. 441, 2001. • The major explanation for the persistently high unemployment has been a deficiency of demand promoted by inappropriate fiscal and monetary policy • the dominant economic orthodoxy has supported politicians who have constrained their economies under the pretext that the role of policy is to ensure the economy functions of the "natural rate of unemployment" pretending to fight inflation • but high unemployment inhibits both real growth and standards of living • the orthodox NAIRU approach creates a fluctuating buffer stock of unemployed using tight fiscal and monetary policy with high economic and social costs • there is another option available: governments can more effectively anchor prices and maintain full employment with an open ended, fixed wage buffer stock of employed workers: the Job Guarantee (JG) policy • the JG approach is a paradigm shift from both traditional Keynesian policies and the NAIRU-buffer stock approach • macroeconomic issues: implications of the impact on the budget deficit, implications for inflation, implications for the balance of payments • budget deficits are necessary to maintain full employment if the private sector is to pay taxes and is a net saver • the orthodox treatment of the government budget constraint as an ex ante constraint is in error • government spending is only constrained by what real goods and services are offered in return for it — there is no financing requirement • debt issuance as part of a reserve maintenance operation by the central bank consistent with their monetary policy cash rate targets

L.R. Wray, P.R. Tcherneva: Employer of Last Resort: A Case Study of Argentina's Jefes Program. www.epicoalition.org, 2005. • Argentina, after having adopted a currency board, opening markets, downsized government, and freed capital during the 1990s, its economy collapsed and unemployment and poverty skyrocketed, it implemented a limited employer of last resort program: Jefes • the program provides a payment of 150 pesos per month to a head of household for a minimum of 4 hours of work daily • by most measures, the program has been a tremendous success, providing jobs to 2 million workers or about 5% of the population, and about 13% of the labor force • in 2002, Jefes replaced an older social protection program • success evaluation: program spending is well targeted to the intended population (poor households with children), the program provided needed services in poor communities, and has increased income of poor households (althought not above the poverty line) • cases of mismanagement or corruption have been rare • surprisingly, women account for over 60% of participants, most of them previously outside of labor force • budget was $1987 mio., of which $600 mio. was funded by the World Bank • it is not likely that Argentina's $ earnings will be significant • in fact, the World Bank foreign currency loan was not required • households have been forced to make a choice concerning who would participate in the program • if this restriction were dropped, many poor families would send both husband and wife into the program, providing a minimum family income of 300 pesos monthly, and unemployment rates would also decline • the program is well received by the beneficiaries and produces useful projects • there have been heavy critiques among heterodox researchers ("unemployment by another name", "communism", "fascism", "slavery", "NAIRU with a human face", "unsustainable government deficits and debts", "dropping money from helicopters") • early experience shows that a huge program can be implemented quickly without major problems in an environment of economic, political and social instability • the Jefes program proves that people will show up to work even at very low wages • survey results demonstrate that the pay is a relatively minor consideration: people wanted to participate and make a contribution to society • a distinguishing features of its institutional design is its decentralized model of administration (municipal governments) • the projects provide real benefits to the community • by registering the unemployed, issuing them social security cards, involving them in training and employment, and assisting them in reentering the private sector markets, the program is able to move people from the informal (gray markets) to the formal sector • a significant number of people have moved into the private sector • the ELR wage puts a floor on wages in both the private and public sectors • the exchange rate has improved and stabilized; the rate of inflation has stabilized • estimates are that the effect of Jefes on growth is overwhelmingly positive: the multiplier effect of the increase in income due to the Jefes benefit is 2.57 • the annual addition to GDP is calculated to be 2.49% of GDP • Keynes: "the Conservative belief that there is some law of nature which prevents men from being employed, that it is 'rash' to employ men, and that it is financially 'sound' to maintain a tenth of the population in idleness is crazily improbable"

P.R. Tcherneva, L.R. Wray: Is Jefes de Hogar an Employer of Last Resort Program? An assessment of Argentina's ability to deliver the promise of full employment and price stability. Working Paper 43, Center for Full Employment and Price Stability, Kansas City, 2005 / 7^o Congreso Nacional de Estudios del Trabajo, 2007. • Neither accepted economic theory nor practical experience indicate that full employment is even possible with stable prices → unemployment is almost universally perceived as the inevitable cost of price stability • description of the "employer of last resort" (ELR) proposal as a policy to achieve true full employment without inflation • the purpose of the program is to supplement but not to replace alternative employment as provided by private firms or other government programs • ELR offers employment to those who are ready, willing, and able to work, but do not find jobs • if properly designed, ELR helps stabilize prices throughout the economy • any country with own currency and floating exchange rates can implement an ELR program • ELR is only possible with sovereign control over the national currency, currency boards or monetary unions • ELR has 6 characteristics: 1) it offers an infinitely elastic demand for labor; 2) it hires off the bottom (= employment safety net: it stabilizes the price of the buffer-stock = wages at the bottom); 3) it operates with loose labor markets and creates an employable pool of labor; 4) it pays a fixed decent living wage; 5) it maintains and enhances human capital; 6) its employees perform valuable work • ELR could result in a persistent government deficit — but that does not "burden" future generations and cannot lead to "financial ruin" of the government if all government spending is financed by crediting a member bank's account at the central bank • government spending is "financed" by money creation, not by taxes • bond sales are only required to "drain" reserves in order to hit interest rate targets • there is no "burden" of servicing government debt • these conclusions are not valid if the government has issued debt denominated in foreign currencies • fear of deficit spending is irrational • generally, deficits can be too large: if aggregate demand is increased beyond full employment, causing inflation • the universal abondonment of the gold standard leaves no rational barrier to deficit spending as a means to hire all of the unemployed • government deficits "finance" savings of the private sector (hoarding of money) • 2 institutional characteristics ensure that ELR is not inflationary in and of itself: a) the ELR program ensures that budget deficits will never be too large or too small (aggregate demand too low → unemployment → the unemployed are hired at the basic ELR wage, increasing the budget deficit → ELR as automatic stabilizer); b) the basic ELR wage is set by the government and is effectively a minimum wage • other reasons, why ELR will enhance price stability: 1) ELR directed to infrastructure work can have a positive impact on private sector productivity, which helps ward off inlationary pressures; 2) firms can maintain reserve capacity, normally complemented by a reserve army of unemployed, but now employed with ELR; 3) ELR activities are not constrained by private sector efficiency criteria → flexible full employment; 4) public works tend to be less inflationary because they increase both aggregate supply and aggregate demand; 5) by offering training and education, ELR helps appreciate human capital → by enhancing productivity, it decreases the risk of inflation; 6) ELR reduces a number of other social and economic costs • if the currency is "backed by" a relatively fixed supply (precious metal or other currency), then the ELR proposal becomes impossible to implement during a crisis • during the Great Depression, part of the reluctance to deficit spend was the convertible nature of the currency

S.T. Fullwiler: Macroeconomic Stabilization through an Employer of Last Resort. CFEPS Center for Full Employment and Price Stability, Working Paper 44, 2005. • Employer of last resort (ELR) = job guarantee = public sector employment → as alternative to unemployment as the primary means of currency stability • a job provided to all at a decent, fixed wage • the quantity of workers employed in the program would rise and fall counter to the economy's cycles • important advisory role in Argentina's Jefes jobs program that brought over 5% of the population into jobs • this approach to hiring "off the bottom" is a more direct means of eliminating excess, unused labor capacity • stabilizing effect of fluctuating buffer stock of ELR workers and the fixed wage • an ELR program allows markets to set the quantity (as the government provides an infinitely elastic demand for labor), while the price (= base wage) is set exogenously • aside from an initial increase, the program would not generate inflationary pressures • quantitative modeling the macroeconomic stabilization properties by utilizing the Fairmodel (Ray Fair's dynamic, nonlinear model of the U.S. economy: 30 stochastic equations, 130 endogenous and over 100 exogenous variables) • Fairmodel's stochastic equations are essentially driven by data and demonstrate structural stability across several business cycles and policy regime changes • Fair: "Agents ... form expectations ..., but these expectations are not assumed to be rational ... Agents are not assumed to know the complete model." • "production is smoothed relative to sales" • Fair's tests reject the NAIRU dynamics in which inflation spirals out of control if unemployment falls below a certain level • independence of the interest rate from rising public deficits support the view of endogenous money • Fair's contributions to the stock-flow consistent approach • some equations added to the Fairmodel for a simulation from 1985 to 2005

P.R. Tcherneva, L.R. Wray: Common Goals—Different Solutions: Can Basic Income and Job Guarantees Deliver Their Own Promises? Rutgers Journal of Law & Urban Policy, 2(1), 2005. • The Argentinian Jefes experience demonstrates that an ELR job-creation program can be designed such that it provides a social safety net, enhances civic participation, fosters grass-roots democracy, and broadens the meaning of work — without disastrous consequences on the currency • income guarantee supporters champion the provision of an adequate standard of living by a Basic Income Guarantee (BIG) for all • job guarantee supporters champion the provision of access to a job with minimum income by an Employer of Last Resort (ELR) • the basic distinction beween them is whether the income-work relationship is decoupled or not • the paper argues that BIGs are unlikely to achieve the objectives of alleviating poverty, income inequality, or poor standards of living because they are inherently highly inflationary, and the paper argues that programs like an ELR achieve most of the common goals without introducing inflation • BIG and ELR can be complementary policies: basic income is needed for those who are too young, too old, or too ill to work • the BIG proposals vary in size (income at subsistence level, official poverty line, minimum standard of living, or highest sustainable level) • price stability is defined on the basis of wage units • ELR promotes price stability so long as ELR operates as a buffer stock • the value of the $ is determined on the margin by what must be done to obtain it: the purchasing power of the $ in terms of labor units would be infinitesimally small under a universal BIG scheme (this evolves over time) • the income in a BIG program is continually eroded, thus depriving people of these resources, necessitating increases in the basic income to be paid • the program's goals of increased transparency, quick implementation, manageable cost, and little intrusive government intervention have been achieved: these goals are shared by BIG and ELR supporters • the multiplier effect of the increase in income due to Jefes is 2,57% → the impact of 150 pesos per person per month for 1.8 million beneficiaries is an annual addition of 2,49% of GDP • a BIG program with absence of a work requirement devalues the currency • a job guarantee coupled with a basic income for the young, the frail old and the disabled of all ages is a promising policy alternative: it is within our reach and can counter many of the modern market and welfare state imperfections • appendix: the multiplier effect of Jefes

Global Conference on Employment Guarantee Policies: Theory and Practice. The Levy Institute of Bard College, 2006. • D.B. Papadimitriou's keynote: Employment Guarantee Policies: Theory and Practice • H. Minsky's view: achieving full employment should not be based on subsidizing demand which would lead to instability and inflation, but to create an infinitely elastic demand for labor at a fixed wage • a common reaction to the ELR employment strategy is that it is inflationary — but it is not • the only applications so far coming close to job guarantee policies are the programs in Argentina and India • neither of these provides an infinitely elastic demand for labor • P. Chakraborty's research: India's national plan's induced fiscal expansion would not contribute to higher fiscal imbalances if the expenditures of other public employment programs were taken into account • J.K. Galbraith's keynote: Equality, Efficiency, and the Goal of Full Employment • the natural rate of unemployment is possibly not the worst idea ever honored by a Nobel Prize, but it is surely the most costly • Keynes's involuntary unemployment stemmed from an insufficiency of aggregate-effected demand: an increased demand could make it go away • but 2 features of Keynes's vision are rooted in the 1930s: 1) the assumption that sufficient capital equipment exists to employ all, and 2) the assumption that the effective supply of labor is reletively fixed • in contrast, today there is a vast, elastic supply of labor • the problem of unemployment is closely associated with the problem of economic inequality (in both directions: rise in unemployment → rise in inequality; a higher level of inequality in working conditions → some workers wait for the small possibility of getting a better job → structural unemployment over a long period of time: migration phenomena in developing countries and China, highest unemployment rates in Europe with least egalitarian countries with weakest trade unions and highest span in wages) • contrary to classical wisdom, Europe's high unemployment is consistent with its high inequality • ELR programs will be limited by the fiscal capacity of the state • A. Baduri's keynote: Institutional and Legal Requirements for Effective Demand Management for Employment • 3 reasons why India's National Rural Employment Guarantee did not work: 1) in the globalized world, a state has to get a bigger share of the international market by cutting costs and improving efficiency; 2) economy's basic support comes from keeping the stock market happy (play by the rules of the World Bank and the IMF); 3) massive infrastructure development projects funded by outside sources and benefiting only a small fraction of Indian upper society, totally incompatible with an employment-centered program • as a result, the employment growth rate has never been lower in postindependent Indian history than it is today • decentralization would have created nonmarket values • L.S. Shouleva: The Positive Experience of Bulgaria in Curbing Unemployment • In 2001, the rate of unemployment in Bulgaria amounted to 19%, and more than 50% of the unemployed had been without a job for a long time • the government introduced an effective and efficient financial model: from 100 units of expenditures for the program, 78 units were for wages and 22 units for social security and health insurance, saving 32 units of social security benefits they would have received otherwise, and contributing 22 units to the pension and health care system reducing the deficits in these → so the net expenditure for the program amounts to only 36 units • within 4 years of this program, the number of long-term unemployed has decreased from 330,000 to 185,000 → unemployment is no longer the main problem in Bulgaria — unemployment reduced by almost 10% • Session 1: Employment Guarantee Policies • M. Forstater: the costs of unemployment, the social and economic benefits of employment guarantee schemes: income, production, recognition; via social multipliers: decreased crime, better education, health care • M. Forstater: a well-designed employment guarantee program can serve as an automatic stabilizer and ensure manageable government budget deficits • D. Kostzer: for Argentina, a policy of full employment is the best social policy, it improves aggregate demand and income distribution, fixes a minimum wage, and is countercycliclical • S. Miller: outline of the various employment schemes by the ILO over the past 25 years • S. Miller: a road built by light equipment could create 3 to 5 times more direct employment than one built by heavy equipment • S. Miller: programs based on self-help or unpaid labor werde more expensive than programs based on paid labor because productivity and quality were low • S. Miller: the potential to reduce the unemployment rate can be as high as 10% — income and employment multipliers from labor-based projects are much higher than equipment-based projects • Session 2: Employment Guarantee Policies: Budgetary Implications and Price Effects • P. Harvey: additional taxation and borrowing are not necessary; it is possible to achieve full employment with price stability when funding job guarantee programs • P. Harvey: a job guarantee program would create a buffer stock of qualified labor whose availability for hire at a constant wage level would restrain the wage inflation • P. Harvey: a government-funded job guarantee program would not require additional deficit spending or any additional income redistribution (e.g. taxation) • L.R. Wray: government is the only institution that can provide a "perfectly elastic" demand for labor • L.R. Wray: ELR anchors a country's currency and increases macroeconomic stability • L.R. Wray: ELR creates a buffer stock for labor closely tied to the business cycle; the ELR wage would serve as a wage and price anchor that would stabilize the effective minimum wage and unit labor costs, and lead to greater price stability • L.R. Wray: the initial effect of a buffer stock program could raise consumption and imports by setting a floor price above the prevailing market price • L.R. Wray: the Jefes program in Argentina show that a huge program can be implemented quickly without major problems and under conditions of economic, political, and social instability • L.R. Wray: the Jefes program was financed by the government with no more than 80% (usually 60%), its wage has become the effective minimum wage, and it has not generated uncontrolled inflation or currency depreciation • L.R. Wray: Argentina's macroeconomic conditions have improved with the Jefes program • S. Mehrotra: many problems with public employment guarantee programs in India • Session 3: Modeling Employment Guarantee Policy • R. Antonopoulos, M. Fontana: unpaid work generates goods and services that dramatically increase GDP, but this work is undervalued, undercounted, and unprotected • R. Antonopoulos, M. Fontana: social policy must be rooted in economics because economic policies have a social content • R. Antonopoulos, M. Fontana: the detailed structure of social accounting matrix (SAM) based multiplier models enables the models to outline the connection between output and income of specific socioeconomic groups • R. Antonopoulos, M. Fontana: contribution of household production in a country's economy range from 20% to 60% of GDP • R. Antonopoulos, M. Fontana: irrespective of the costs of eliminating unemployment, public expenditures for job creation is an issue of ethics, justice, and social inclusion • S.T. Fullwiler: potential macroeconomic stabilization properties of an ELR program using the Fairmodel • S.T. Fullwiler: the model showed that an ELR program moves the U.S. economy to a permanently higher level of real GDP and that swings in GDP levels due to exogenous shocks are less pronounced, and would have only modest budgetary impacts (0.6% to 1.25% of GDP) • S.T. Fullwiler: an ELR program does not necessitate government deficits, as state and local budgets improve due to the economy's enhanced stability and higher real GDP • S.T. Fullwiler: simulations show that countercyclical fiscal policies (including ELR) can promote both full employment and price stability • S.T. Fullwiler: it will not be easy to implement an ELR program: logistical, administrative, and political complexities • F. Kaboub: proposal of an ELR plan for Tunisia • F. Kaboub: in Tunisia, two-thirds of new job seekers have a university degree • F. Kaboub: the highly skilled workers could be engaged as public school tutors and health care consultants, and in projects designed specifically for conservation and environmental protection • Session 4: Institutional Arrangements • J.A. Kregel: Jefes is the first and only program that has successfully been able to include an education component • J.A. Kregel: the Jefes program allows women an active role in the community, at the same time combining family and work experience • J.A. Kregel: an ELR program should also provide health services and preventive health training for families • J.A. Kregel: a suitably designed ELR program can satisfy all UN's Millenium Development Goals (MDG) at a much lower cost, in a much shorter period of time, and further ensuring that policy is counter cyclical • J.A. Kregel: ELR programs do not depend on external financing, and the majority of expenditures will be on domestically produced goods • I. Hirway: the successful enforcement of guarantee work programs requires government commitment, administrative competence, and social mobilization • Session 5: Country Experiences: Morocco and Argentina • H. Jalal: objectives and actions of Morocco's Promotion Nationale (PN) • H. Jalal: PN expenditures per capita at the provincial level have not been correlated with poverty — a large part is directed to urban nonpoor zones • P.R. Tcherneva: the Jefes program provides 4 hours of work per day to unemployed heads of households at 150 pesos per month: ¾ of participants are women, 87% of activities are community projects, and the government finances a maximum of 60–80% of the cost of individual projects • P.R. Tcherneva: the Jefes program was operative within 4 months and required < 1% of GDP • C. Pastoret, M. Tepepa: ELR should be linked with community development; women relied on social networks to survive within very hostile environments of high unemployment, insecurity, violence, and malnutrition • C. Pastoret, M. Tepepa: however, men were ashamed to be in the program, except when receiving education and training • Session 6: Country Experiences: South Africa, Sri Lanka, and Bangladesh • O. Akintola: South Africa has one of the highest rates of poverty and inequality, closely related to the unemployment rate (26.5%, but 31% for Africans) • O. Akintola: there will be a window of opportunity for the government to make public job creation a policy priority • O. Akintola: the National Public Works Programme from 1992 achieved only a minimal reduction of poverty levels among particpating households • O. Akintola: coping with AIDS-related illnesses can cause a fall in income of 66–80% and pose a major threat to food security in households • S. Desilva: a political-economic analysis of the root causes of youth employment problems in Sri Lanka • S. Desilva: meaningful educational reforms and a more comprehensive approach are needed • S. Desilva: "skill mismatch" hypothesis faults the educational system for raising employment expectations without giving students the skills valued by employers • S. Desilva: the real world situation: supply bottlenecks in the educational system, distorted labor markets, strong job preferences, and informational problems • M. Rabbani: review of the Rural Maintenance Program (RMP) from 1983 in Bangladesh • M. Rabbani: 20–30% of the people persistently live in extreme poverty • M. Rabbani: cost-benefit analyses show positive effects of the RMP in terms of income, literacy, social awareness, and gender empowerment • M. Rabbani: fundamental problems are promotion of self employment for all workers and failure to recognize the heterogeneity of the extremely poor • Session 7: Roundtable Discussion

R. Antonopoulos: The Right to a Job, the Right Types of Projects: Employment Guarantee Policies from a Gender Perspective. The Levy Institute of Bard College, Working Paper No. 516, 2007. • Private-sector investment has not been able to absorb surplus labor, especially poor unskilled people • public works programs and employment guarantee schemes in South Africa, India, etc. provide jobs while creating assets • people around the world spend long hours performing unpaid work, including time spent that helps fill public infrastructural gaps (e.g. in the energy, health, and education sectors) • by bringing together public job creation and unpaid work, well-designed employment guarantee policies can promote job creation, gender-equality, and pro-poor development

P.R. Tcherneva: The Return of Fiscal Policy: Can the New Developments in the New Economic Consensus Be Reconciled with the Post-Keynesian View? The Levy Institute of Bard College, Working Paper No. 539, 2008. • The monetarist counterrevolution and the stagflation period of the 1970s were among the theoretical and practical developments that led to the rejection of fiscal policy as a useful tool for macroeconomic stabilization and full employment determination • however, recent mainstream contributions have begun to reassess fiscal policy and have called for its restitution in certain cases • in contrast to the monetarist counterrevolution, the New Consensus now holds that central banks cannot exogenously alter the stock of money: they can only set exogenously the short-term interest rate, leaving the money supply to be determined endogenously by the credit needs of the economy • the goal of this paper is to delimit the role of and place for fiscal policy in the New Economic Consensus (NEC) and to compare it to that of Post-Keynesian theory, the latter arguably the most faithful approach to the original Keynesian message • the core propositions of the NEC as an 3 equations model:

IS equation:	yt=gt+Et(yt+1-gt+1)-σ( it-Etπt+1)	current output yt is a function of some composite exogenous disturbance gt, given nominal target interest rate it and current expectations of future inflation rates Etπt+1
New Keynesian Phillips curve:	πt=k(yt-ypt)+βEtπt+1	the rate of inflation πt is a function of the output gap yt-ypt and current expectations of future inlation rates Etπt+1
Taylor rule:	it=in+φπ(πt-πt*)+φy(yt-ypt)	the current operating target, the funds rate it, adjusts to an implicit desired funds rate, the Wicksellian "natural" rate of inflation in, and to changes in inflation rates and output from their targets

• restitution of fiscal policy in the NEC: once the short-term interest reaches 0, no further monetary policy is possible → fiscal policy is called to the rescue • • the paper proposes that, while a consensus may exist on many macroeconomic issues within the mainstream, fiscal policy is not one of them • the designation of fiscal policy within the NEC is explored and contrasted with the Post-Keynesian calls for fiscal policy via Abba Lerner’s "functional finance" approach • the paper distinguishes between two approaches to functional finance — one that aims to boost aggregate demand and close the GDP gap, and one that secures full employment via direct job creation • it is argued that the mainstream has severed the Keynesian link between fiscal policy and full employment — a link that the Post-Keynesian approach promises to restore

P.R. Tcherneva: Keynes’s Approach to Full Employment: Aggregate or Targeted Demand? The Levy Institute of Bard College, Working Paper No. 542, 2008. • This paper argues that John Maynard Keynes had a targeted (as contrasted with aggregate) demand approach to full employment • modern policies, which aim to "close the demand gap", are inconsistent with the Keynesian approach on both theoretical and methodological grounds • aggregate demand tends to increase inflation and erode income distribution near full employment, which is why true full employment is not possible via traditional pro-growth, pro-investment aggregate demand stimuli • this was well understood by Keynes, who preferred targeted job creation during expansions • but even in recessions, he did not campaign for wide-ranging aggregate demand stimuli; this is because different policies have different employment creation effects, which for Keynes was the primary measure of their effectiveness • there is considerable evidence to argue that Keynes had an "on the spot" approach to full employment, where the problem of unemployment is solved via direct job creation, irrespective of the phase of the business cycle • Keynes favored public employment schemes, generally in the form of public works, to be implemented both in recessions and in economies near full employment • Keynes innovative principle of effective demand is quite distinct from the theory of aggregate demand • targeting demand via public works would be done irrespective of the stage of the business cycle; whether this targeting meant more public works or better distributed public works depended on the level of economic activity • Keynes objections would also rule out Post Keynesian proposals of a social dividend (as in Robinson 1949) and basic income guarantees (King 2001 and Sawyer 2005) • Keynes wanted to stabilize investment by public investment • Keynes's theory of effective demand is a theory about the factors that determine investment in a monetary production economy, while the theory of aggregate demand is a theory of boosting current expenditure • Keynes: near full capacity, increasing aggregate demand would not produce full employment • unemployment for Keynes was always a result of deficient effective demand, not deficient aggregate demand • the point of effective demand consistent with full employment is given by the cross section of the current supply price of output and the future demand price of output • policy can influence the factors determining the level of employment (the marginal propensity to consume, the marginal efficiency of money, or the marginal efficiency of capital) • working with the marginal efficiency of money to increase private investment is not very effective, especially when interest rates are already very low • boosting the marginal efficiency of capital (profit expectations) also has its limitations • in severe slumps, public capital improvements should help • in expansions, appropriately distributed demand is needed, and policy has to fight structural unemployment, redirecting public works to areas with the highest remaining unemployment • Keynes (Activities 1931–1939): "every pound saved puts a man out of work" • for Keynes, the first objective of policy was to hire people by whatever means possible; to make public works useful and effective and integrate them into a long-term stable public investment was only his second objective • for Keynes, the gap that needed closing was the labor demand gap, not an output gap as measured in current prices • the original Okun's law: when growth deviated by 1% from its long-term trend, unemployment fell by 0.3% (but a very weak relationship) • modern policy often sacrifices the goal of full employment in the name of maintaining price stability — precisely this approach of closing the gap that advocates pro-investment, growth-at-all-cost aggregate demand growth generates the inflationary pressures • Keynes's approach to full employment was one of targeted demand, whereby policy targets unemployment directly, not some generalized level of output or economic activity • measures of potential output have no useful meaning over a longer period of time • modern output gap analysis is wholly inconsistent with Keynes's method for producing full employment

K. Kim: Hypothetical Integration in a Social Accounting Matrix and Fixed-price Multiplier Analysis. The Levy Institute of Bard College, Working Paper No. 552, 2008. • This study proposes a simple modification to a Social Accounting Matrix (SAM) in order to analyze the multiplier effects of a new sector • a different input composition, or technology, of the sector makes a conventional analysis of final-demand injections on existing sectors invalid • it is shown that the modification of so-called "hypothetical integration" is an efficient way to incorporate the difference into the SAM, rather than costly full-scale rebalancing • this method is applied to the case of the Expanded Public Works Programme in South Africa, and this demonstrates that the proposed approach effectively represents the labor intensity requirement of the program and a new-factor income distribution

Post-Keynesian Growth Theories

P. Commendatore, S. D'Acunto, C. Panico, A. Pinto: Keynesian Theories of Growth (abstract only). In N. Salvadori (ed.): Old and New Growth Theories: an Assessment. Pisa, 2001 / Edward Elgar Publishing, 2003;   The Paper. • A coherent Keynesian approach to growth can be based on 3 principles: • 1) economic system may not tend to full employment • 2) investment decisions are independent of saving decisions • 3) the autonomous components of demand may affect the rate of growth • different lines of development have emerged • Harrod: centrifugal forces tend to widen the gap between actual and warranted rates of growth — centripetal forces are activated as the warranted approximates the natural growth path • effective demand pushes the economic system close to full employment • review of the diverse Keynesian analyses concerning the 3 components in a unified analytical framework • recent contributions inspired by Robinson and Kalecki related to private investment are summarised in a general model • development of the Keynesian line of research on growth in an open economy (Thirlwall) • brief assessment of a further group of Keynesian growth analyses based mainly on cumulative causation (Kaldor)

A. Sinha: Reading Sraffa: The Philosophical Underpinnings of Production of Commodities by Means of Commodities. Working paper from esocialsciences.com / 4th Conf. of the Association for Heterodox Economics (AHE), 2002. • It is argued that both the Sraffians' interpretation based on the classical notion of centre of gravitation as well as the neoclassical interpretation based on the supposedly implicit assumption of constant returns to scale are incorrect • the absence of time in Sraffa's system • central feature of Sraffa's project was to show that the notion of a causal functional relation between prices and methods of production (at the foundation of neoclassical theory) is illogical

K. Saeed, M.J. Radzicki: A Post Keynesian Model of Macroeconomic Growth, Instability, and Income Distribution. In E. Zepeda, J.A.D. Machuca (eds.): The Role of Strategic Modelling in International Competitiveness. Proc. of the 1993 International Conf. of the System Dynamics Society. Cancún, 1993. • The "Post Keynesian Institutionalists" engage in macroeconomic modeling similar to the system dynamics method • the neoclassical synthesis postulates that, although market forces will ensure full employment in the long run, Keynesian demand management policies are necessary to ensure it in the short run • Post Keynesians believe that the distribution of income both determines, and is determined by, the behavior of the economy • a Post Keynesian macroeconomics 1 sector, 2 factor economy model with economic growth, capital ownership and wage determination (a modified Samuelson1970/Hicks1972 multiplier and accelerator model with production and sales decoupled through a backlog accumulation, allowing consumption to vary according to worker income) • multiplier: an autonomous increase in sales → increasing desired production by increasing backlog → reducing unemployment, expanding worker income and consumption → further expanding sales • accelerator: increasing desired production → capital investments → sale induced • negative feedback: backlog → reducing desired production → clears the market • the wage determination feedback loops

E. Stockhammer: Robinsonian and Kaleckian Growth. An Update on Post-Keynesian Growth Theories. Wirtschaftsuniversität Wien Economics Working Paper No. 67, 1999. • New growth theory focuses on the contribution of knowledge and innovation • varying assumptions in post-Keynesian growth models:

Assumptions		Employment
		full employment	unemployment
Capacity	full	Kaldor	Robinson (in equilibrium)
	excess		Kalecki

• principle of effective demand: investment determines savings • Kaldor: the difference in saving propensities comes from the difference between workers and firms, not workers and capitalists (firms withhold part of profits in order to finance investment) • the crucial assumption: the saving propensity out of profits is higher than that out of wages • the Keynesian labor market equilibrium is not market-clearing • workers and capitalists can only bargain over nominal wages, determined by respective income positions • this is not eo ipso in contradiction with wage = marginal product of labor (profit maximization under standard production functions) • Keynesian model: conventional wage in combination with demand factors determine the marginal productivity of labor • increasing savings propensity → decreasing output • increasing profit share → decreasing output (short-run) • Keynesian economics: investment drives the growth process • 4 factors of investment: present = future profits, demand growth (accelerator), availability of finance, rates of return of financial investment • Robinsonian model: increasing investment → higher profits (long-run) • Kaleckian model: if the capacity effect outweighs the profit effect, growth is wage lead — if the profit effect is stronger than the capacity effect, growth is profit lead • in the first case, distribution is no longer a zero sum game

S. Keen: Neoclassical growth theory. Putting it out of its misery (slides). From: debunking Economics: The Naked Emperor of the Social Sciences, Pluto Press & ZedBooks, Sydney & London, 2001. • The "adding up" problem • neoclassical theory is inherently static/micro • why use it to analyse growth? • the Cobb-Douglas production function with constant returns to scale is an algebraic transformation of the accounting identity for income distribution with relatively constant shares! • the closer real data is to assumptions of constant income shares and constant wages growth, the closer the "fit" of the Cobb-Douglas "production function" will be • the neoclassical growth literature still ignores this critique • neoclassical growth model irrelevant to actual issues of growth and development

C.H. Dos Santos, G. Zezza: A Post-Keynesian Stock-Flow Consistent Macroeconomic Growth Model: Preliminary Results. Levy Economics Institute Working Paper No. 402, 2004. • Early Post-Keynesian growth models are deficient with respect to monetary aspects • extending Lavoie and Godley's model to account alos for the existence of a government sector with central bank • mainstream views about these issues assume that economy's long-run equilibrium is pre-determined by real factors and that government and central bank can only facilitate the convergence • the model here assumes that the Keynesian Principle of Effective Demand is valid even in the long-run and that monetary factors play a crucial role in the long-run dynamic path • stock-flow consistent (SFC) constraints introduce considerable structure to an otherwise intractable macroeconomic reality • stock-flow relations hold irrespective of expectations • assumptions about the monetary flows among all sectors:

expenditures of→ income for↓	Production	Households	Firms	Banks	Central Bank	Government	Capital Account	Total
Production	+Net of intermediate goods	+Consumption				+Public expenditure	+Investment	+Produced goods
Households	+Wages		+Distributed profits of firms	+Interest on bank deposits +Distributed profits of banks		+Interest on treasury bills		+Total receipts of households
Firms	+Total profits							+Total profits
Banks			+Interest on loans to firms			+Interest on treasury bills to banks		+Total receipts of banks
Central Bank				+Interest on central bank advances1		+Interest on treasury bills to central bank		+Total receipts of central bank
Government	+Indirect taxes	+Direct taxes	+Taxes on profits		+Difference receipts-payments of central bank			+Total receipts of government
Capital Account		+Household savings	+Undistributed profits	0	0	+Savings of government		+Savings of the economy
Total	+Produced goods	+Total receipts of households	+Total profits	+Total receipts of banks	+Total receipts of central bank	+Total receipts of government	+Investment of the economy

¹Darlehen   Assumptions: no inventories (produced goods = sales)

• aggregate stocks of wealth and debt balance sheet:

debt of→ wealth of↓	Households	Firms	Banks	Central Bank	Government	Total
High powered money	+Cash held by the public		+Bank reserves	-Total stock of cash		0
Central bank advances			-Central bank advances	+Central bank advances		0
Bank deposits	+Stock of bank deposits		-Stock of bank deposits			0
Loans		-Stock of loans	+Stock of loans			0
Bills	+Stock of treasury bills held by households		+Stock of treasury bills held by banks	+Stock of treasury bills held by central bank	-Stock of treasury bills total	0
Capital		+Stock of capital				+Capital stock
Equities	+Stock of equities at market prices	-Stock of equities at market prices				0
Total (net worth)	+Total net worth of households	+Total net worth of firms	0	0	-Stock of treasury bills (total)	+Capital stock

• sources and uses of funds:

owners→ changes in↓	Households	Firms	Banks	Central Bank	Government	Total
Cash	+Increase of public cash		+Increase of bank reserves	-Reduction of total stock of cash		0
Central bank advances			-Reduction of central bank advances	+Increase of central bank advances		0
Bank deposits	+Increase of stock of bank deposits		-Reduction of stock of bank deposits			0
Loans		-Reduction of stock of loans	+Increase of stock of loans			0
Treasury bills	+Increase of stock of treasury bills held by households		+Increase of stock of treasury bills held by banks	+Increase of stock of treasury bills held by central bank	-Reduction of stock of treasury bills total	0
Capital		+Increase of capital stock				+Increase of capital stock
Equities	+Increase of stock of equities at market prices	-Reduction of stock of equities at market prices				0
Total	Savings of households	Retained profits	0	0	Savings of the government	Savings of the economy

• the model does not assume a "pure credit" economy: a demand for cash is introduced, proportional to payments on consumption • government expenditures, financed by central bank purchases of treasury bills, increase the amount of circulating cash • loans granted to firms by banks and transferred to households introduce bank deposits • at the end of a period, private banks demand the cash not already satisfied by the central bank's financing: they borrow it from the central bank • firms pre-tax total profits are assumed to be determined by a mark-up on wages • as inflation plays a crucial role, changes in the mark-up must be carefully analyzed • assumption that productivity growth fluctuates randomly around a fixed average • conditions in the labor market — as measured by the unemployment rate — influence the increase in wages, profits and inflation for a given increase in productivity • parameter χ = strength of workers • when firms are strong (χ<1), they tend to rise their mark-up instead of dropping prices by the decrease in unit labor costs • when χ=1, wages rise in line with productivity, mark-up is unchanged → no inflation • χ>1 → inflation, change in income distribution towards wages • because the model is highly non-linear, it can only be analyzed by virtue of dynamic simulations • the model quickly converges to a steady growth path, characterized by stable stock-flow ratios over a wide range of plausible parameter values • experiment: a lower propensity to save • experiment: an exogenous shock to wage inflation • experiment: a growth in labor productivity → the growth path returns to the baseline, but employment reduced • experiment: a change in income distribution (exogenous increase in mark-up under constant prices) → lower growth path • under fixed mark-up and no inflation, increases in real government expenditures move the economy on a substantially higher growth path → rise in utilization, drop in unemployment • a permanent increase in tax rate on wages → slows down growth, higher unemployment • increase in indirect tax rate → increase in price level, adverse effect on growth • a rise in interest rates has an overall short-run negative effect on consumption, and with a lag an indirect effect on investment, but cash held increases • monetary policy will be less effective than fiscal policy in the long-run • a rise in the bank reserve requirement → fall in consumption and of bills issued by the government • the growth model will exhibit cycles around its steady-growth path

E. Hein: Interest, debt and capital accumulation — a Kaleckian approach. IMK Working Paper 5/2005, Hans-Böckler-Stiftung, 2005. • Introduction of monetary variables into post-Keynesian models for distribution and growth (Keynes 1933: monetary theory of production) • integrate the rate of investment explicitly into the investment function • rising interest rates → lower rates of capital accumulation • rising interest rates → redistribution of income from firms to rentiers → effect on consumption demand and savings • the basic model assumes a closed economy without state activity • no overhead labour → productivity of labor remains constant → constant labour-output-rate • capital-potential output-rate also constant • capital stock not to depreciate • active price setting of firms in incompletely competitive markets according to mark-up on constant unit labour costs • money interest rate is exogenous • quantities of credit and money are endogenous from economic activity • central bank: base rate of interest; commercial banks: market interest rate by mark up • because investment precedes saving, investment has to be financed independently of saving • long-term investment financing through retained earnings, issuing of bonds and shares, and through long-term credit (by rentiers or through banks) • assuming that labourers do not save, while retained profits are completely saved • higher interest rate at a given rate of profit, or a given higher debt-capital-ratio and a given higher rentiers' propensity to save → lower interest rate • higher debt-capital-ratio of firms → reduced saving rate • investments are positively affected by expected sales and retained earnings • rate of interest and debt-capital-ratio have negative impact on investment • the parameters in saving and investment function allow for negative normal as well as positive puzzling effects on capital accumulation • short-run puzzling case → long-run stability of debt-capital ratio • short-run normal case → long-run instability

E. Hein: Wage bargaining and monetary policy in a Kaleckian monetary distribution and growth model: trying to make sense of the NAIRU. IMK Working Paper 8/2005, Hans-Böckler-Stiftung, 2005. • In a Kaleckian monetary distribution and growth model with conflict inflation: what is the role of a Non Accelerating Inflation Rate of Unemployment (NAIRU)? • examination of the short-run stability of a NAIRU • analysis of the short-run effectiveness of monetary policy intervention • problem of the long-run endogeneity of the NAIRU • short-run conclusion: monetary policy interventions are either unnecessary or costly in terms of employment • long-run conclusion: these policies bear the risk of continuously increasing the NAIRU (horizontal Phillips curve, latent stagflation) • instead, the cause of inflation should be directly addressed and wage bargaining coordination should be applied

E. Hein: On the (in-)stability and the endogeneity of the 'normal' rate of capacity utilisation in a post-Keynesian/Kaleckian 'monetary' distribution and growth model. IMK Working Paper 2/2006, Hans-Böckler-Stiftung, 2006. • The normal rate of capacity utilisation as the rate associated with price stability (≡ consistent claims of firms and labourers) • in a Kaleckian monetary distribution and growth model, the normal rate of capacity utilisation is endogenous to distribution conflict and monetary policy intervention in the long-run

N. Salvadori (ed.): Economic Growth and Distribution. On the Nature and Cause of the Wealth of Nations. Edward Elgar Publishing, 2006; contains:   D.K. Foley, L. Taylor: A heterodox growth and distribution model;   G. Zezza, C.H. Dos Santos: Distribution and growth in a post-Keynesian stock-flow consistent model

C. Niggle: Evolutionary Keynesian Macroeconomics. Prepared for the Association for Heterodox Economic 9^th Annual Meeting, Bristol, 2007. • Comparison of New Keynesian Economics (NKE) and Evolutionary Keynesianism (EK) (a synthesis of Evolutionary-Institutionalist and Post Keynesian economics) • mainstream: a synthesis of New Keynesian and New Endogenous Growth economics = "Post Monetarist new consensus" • New Endogenous Growth (NEG) theory accepts the vision of the natural rate of unemployment and the Solow model equilibrium steady-state growth rate as the state which economy tends toward • but NEG assumes that increasing marginal returns are possible, when the capital/labor ratio increases (due to research and development, spillover, externalities, learning by doing, the interrelationships between fixed and human capital, economies of scale) • Evolutionary-Institutionalists argue that economic development is conditioned by (and transforms) economic institutions (money, markets, and property rights) — emphasis on evolutionary institutional change • agreement between NKE and EK: • 1) instability is inherent • 2) one of the causes of unemployment is insufficient aggregate demand • 3) unemployment, recessions and slow growth have high social costs • 4) countercyclical stabilization policy can be effective • 5) monetary policy can be effective in the short-run • 6) money supply is endogenous; central bank should target interest rate • 7) public investment in infrastructure, human capital, education and research are desirable • disagreement between NKE and EK: • 1) EK: fundamental uncertainty, risky investment decision — NKE: only imperfect and asymmetric information modelable with probability distributions • 2) NKE: instability by aggregate supply shocks and external aggregate demand shocks — EK: inherent aggregate demand instability and unstable investment • 3) EK: demand-led growth • 4) EK: government investment necessary for high employment and long-run growth; inflation by distributional struggle; institutions to stabilize wage and price levels ("income policy") • 5) EK: investment usually financed by credit; investment weakly determines savings • 6) EK: low inequality stimulates demnd, profits, investment, and growth • 7) EK: financial market regulation necessary to reduce speculation and financial instability • 8) EK: international exchange rate system necessary to reduce speculation and exchange rate instability • 9) NKE: unemployment caused by market rigidity and structural change; reduce unemployment by increasing labor market flexibility — EK: unemployment caused by insuffient aggregate demand; higher priority to lower unemployment than to low inflation • 10) EK: greater degree of government intervention, regulation and responsibility for macroeconomic performance

L. Dias Carvalho, J.L. Oreiro: Capital Accumulation, Income Distribution, Technical Progress and Endogenous Money in a Post-Keynesian Macrodynamic Model. Associação Nacional dos Centros de Pósgraduação em Economia, Proceedings of the 35th Brazilian Economics Meeting, 2007. • Objective is to analyze the dynamic path of the profit rate, the interest rate, the rate of capital accumulation and the degree of utilization of productive capacity in the presence of exogenous changes of the intensity of technological progress and propensity to save of capitalists within a Post-Keynesian macroeconomic model • the computational simulation showed: • 1) the profit rate is significantly elastic with regard to the rate of technological progress, while the interest rate and degree of utilization of the capacity are little sensitive to this variable • 2) confirmation of the paradox of the thrift (increase in the propensity to save of capitalists reduces the level of aggregate saving)

J.L. Oreiro, L.F. de Paula: 17 Strategy for economic growth in Brazil: a Post Keynesian approach. Universidade Federal do Paraná, Economics Working Paper No. 0051, 2007. • Basic features of a Keynesian strategy to achieve higher, stable and sustained economic growth: • 1) a crawling-peg exchange rate regime in which devaluation rate of domestic currency is set by the Central Bank at a rate = target inflation rate - average inflation rate • 2) market-based capital controls in order to increase the autonomy of the Central Bank to set nominal interest rate according to domestic objectives • 3) reduction of nominal interest rates to be compatible with a real interest rate of 6%/year • 4) reduction of the primary surplus from current 4.5% to 3% of GDP

A. Shaikh: A Proposed Synthesis of Classical and Keynesian Growth. 2007. • Both theories emphasize that accumulation is regulated by profitability • desired investment is driven by its underlying normal profitabilty, and aggregate savings adapts itself to aggregate investment • overall multiplier effects will be smaller than those implied by Keynesian theory • the actual rate of capacity utilization will gravitate araound the normal rate • a rise in the household savings rate will have no permanent impact on the rate of accumulation • this synthesis preserves the dependency of savings on investment • the effects of technical change, wage rates and interest rates, international factors, and fiscal and monetary policy, can proceed from this foundation;   A. Shaikh: Economic Policy in a Growth Context: A Classical Synthesis of Keynes and Harrod. 2007. • Keynesian theory rests on the exogeneity of investment levels and savings propensities • Harrod and Domar accepted exogeneity of saving rates, but investment not only induces production through the multiplier and also expands capacity by adding to the capital stock • there is no growth in Keynesian-type theories unless exogenous demand is growing • growth is inherent in Harrodian-type theories because investment is only sustainable when it is growing • the rate of capacity utilization is a free variable in KT, but HT requires that it gravitates around some given (cost-determined) normal rate • arguments of several Post-Keynesian authors • the antimony between the approaches can be dissolved through Marx's argument that business saving has a fundamentally different purpose from household savings • Marx distinguishes the circuit of revenue C-M-C from the circuit of capital M-C-M' (commodities C, money M) • in the 1st circuit, income is spent on consumption goods and on financial assets • in the 2nd circuit, money is invested (M) with the aim of making profit (M'-M), which in turn becomes foundation for further accumulation • profit is used to either pay dividends or interest costs or help finance current investment through retained earnings (business savings) • theorists traditionally assume that the business savings rate is independent of the needs for investment finance • if the business savings rate responds at all to a gap between desired investment and actual savings, then the overall savings rate will adjust even if the household savings rate does not • desired investment is driven by its underlying normal profitability, and aggregate savings adapts itself to aggregate investment • with the profit rate determined by a socially-determined wage share, profit-driven accumulation can be consistent with a persistent rate of unemployment • main issue at hand: an alternate approach to fiscal policy • main result: if the business savings rate responds at all to a gap between planned investment and existing savings, then profit-driven accumulation (KT) can coexist with normal capacity growth (HT)

A. Shaikh: Globalization and the Myth of Free Trade. 2008. • Empirical evidence that trade liberalization does not automatically produce growth, and growth does not automatically reduce poverty • in the light of the classical theory of competitive advantage, institutions are important, but even more important is advanced technology and large-scale finance • if the markets of a developing country are not internationally competitive, they will lose on a large scale if they open up their markets • it is more likely that free trade and unfettered capital flows will leave developing nations in deficit, debt, unemployment, and underdevelopment • the most appropriate would be trade liberalization in a selective manner, as individual industries become sufficiently competitive

S. Keen: "The Roving Cavaliers of Credit". Steve Keen's DebtWatch No 31 February 2009

Stock-Flow Consistent Accounting

M. Lavoie: The stock-flow consistent approach: background, features, and objectives (slides). Univ. of Ottawa, 2008. • Keynesian and modern (Barro GDE) macroeconomics • Macroeconomics is based on the system of national accounts of the UN 1953 (R. Stone, flow national income and product accounts) • no flow-of-funds and balance sheets • 1968 new System of National Accounts (SNA); SNA 1993 • J. Tobin introduces balance sheets with several distinct assets and liabilities; defining portfolio decisions (behavioural equations based on rates of return • P. Davidson, H. Minsky: distinguish at least between money and equities • Godley, Crips response to monetarism: Keynesians did not pay enough attention to money and other financial assets, to inflation accounting • the quadruple entry principle (Copeland 1949): any change in the sources of funds of a sector must be compensated by at least one change in the uses of funds of the same sector — any transaction must have a counterpart: above 2 changes must be accompanied by at least 2 changes in the uses and sources of funds of another sector • 3 matrices are needed to track flows and stocks: stock matrix (balance sheet), matrix of transactions (flows), revaluation matrix (capital gains) • vertical and horizontal adding-up conditions, symmetry conditions • SFC models: counting equations, identities, 1 of these identities must be removed (redundant or hidden equation) • a model can be closed in several different ways • neoclassical markets clear through price changes — post-Keynesian markets clear either because quantities supplied adjust to demand within that period, or because of buffers • neoclassical economies optimize under constraints rules — in post-Keynesian SFC models agents react to disequilibria by trying to close the discrepancy • in more realistic SFC models, the number of equations rises very quickly • more effort should be put in calibration and empirical work

C.H. Dos Santos: Keynesian Theorizing During Hard Times: Stock-Flow Consistent Models as an Unexplored "Frontier" of Keynesian Macroeconomics. Levy Economics Institute Working Paper No. 408, 2004. • Tobin's "alternative framework" is what we mean by the stock-flow consistent approach to macroeconomic modeling (SFCA) • SFC practitioners are still a minority even among Post-Keynesians • table 1: balance sheets in an "artificial Keynesian economy" for households, firms, banks, central bank, government (asset +, liability -) • Minsky: "cash flows are the result of (1) the income-producing system, which includes wages, taxes and non-financial corporate gross profits after taxes, (2) the financial structure, which is composed of interest, dividends, rents, and repayments of loans, and (3) the dealing or trading in capital assets and financial instruments" • table 2: transactions in the "artificial Keynesian economy" with budget constraints for households' disposible income, firms' gross profits, government's disposible income, and national income • assumptions: (i) interest rates on money deposits, bank loans, government bills, and central bank advancements are all fixed during a given accounting period; (ii) interest on loans obtained in period t are paid in t+1 at rates pre-determined in t • table 3: flow of funds: how the balance sheets are modified by savings — the net worth of a sector is increased by its current savings + capital gains from changes in the market value of its assets • so far, all accounts were nominal • but only equity holders/issuers can have nominal capital gains/losses — the real value of all assets decline with inflation • this structure simplifies away non-bank financial intermediaries (Davidson) and the dichotomies between consumption and capital goods • households decide on consumption and portfolio • firms decide on mark-up on costs, how much to produce, investment, and how to be financed • the government has to decide how to finance its debt, how to regulate the financial markets, how to set the banks' minimum required reserve to deposit ratio, and the interest rates of central bank's advances • banks are assumed to keep a fraction of their (uncertain) total deposits as reserves to be used for giving loans to businesses, buy government bonds, and hold base money "reserves" • the problem of disequilibria • SFC "financial Keynesian" models are an unexplored frontier of Keynesianism • a SFC macroeconomic model forces "to recognize the intrinsic limitations of macroeconomic analysis and to be explicit about how" one deals with them

C.H. Dos Santos, G. Zezza: A Simplified Stock-Flow Consistent Post-Keynesian Growth Model. Levy Economics Institute Working Paper No. 421, 2005. • Table 1: aggregate balance sheets of the institutional sectors • table 2: "current" transactions • table 3: flows of funds • extensions: aggregate supply, aggregate demand, financial behavior (of households, firms, banks, and government), and markets • the short period equilibrium • the long period equilibrium and its interpretation • extensions and simplifications

W. Godley, M. Lavoie: Two-country Stock-flow-consistent Macroeconomics Using a Closed Model within a Dollar Exchange Regime. Cambridge Endowment for Research, Finance Working Paper No. 10, 2003. • Any characterization of a macroeconomic system should be grounded in a double entry accounting framework which combines income/expenditure with flow-of-funds concepts • Mundell-Fleming-type models ignore stock equilibrium and do not take explicit account of responses from the rest of the world • our model with stock equilibrium generates results qualitatively different from usual models • post-Keynesian closure: assumption that central banks set interest rates (rather than to target money supplies) • a lot of simplifying assumptions, yet 93 equations • the main model is based on a rigorous and watertight system of stock and flow accounts • income, consumption, government deficits, exports and imports, price indices, wealth, stock of money, stock of bills held by households or held by the central banks are all endogenous variables • foreign reserves, exchange rate, or one rate of interest can be made endogenous • our view of the impact of balance of payments surpluses or deficits contrasts with the standard view • flexible exchange rates and flexible fiscal policy yield a stable model; endogenous interest rates generate instability • there is not an equilibrium towards which economies and exchange rates are moving

M. Lavoie: A simple stock-flow consistent model with portfolio choice and a government sector (slides). Lecture, About chapter 4 of  W. Godley, M. Lavoie: Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. 2007. • What is the stock-flow consistent (SFC) approach? • financial interdependence between sectors • stock variables arise from flows and capital appreciation • people react and adjust to disequilibria • Tobin (1982): models should: track stocks, have several assets and rates of return, include financial and monetary operations and the adding-up constraints in portfolio equations, satisfy accounting identities • the Portfolio Choice (PC) model: sectors firms, households, government, and central bank — closed economy, no investment, no commercial banks • the stock of money held by households is the buffer between expected and realized values (changes more than money demand) • higher interest rate → higher government debt service → higher income • also in the long-run, since they induce lower propensities to consume → higher tax revenues • by some simple changes of equations, the model can be turned into a neoclassical one

S. Khalil: Price Formation, Income Distribution, and Business Cycles in a Stock-Flow Consistent Monetary Model. Universitá degli Studi di Trento, DISA Research Proposal, 2009. • An extended stock-flow accounting scheme along Keynes-Kalecki lines modeling a more realistic financial sector with a number of securities and financial liabilities • following the stock-flow consistent macro modeling approach — but instead of only discrete time, a discrete-continuous mode model is constructed • emphasis on computational and numerical simulation investigations • a SFC model is a macroeconomic model based on national income and product accounts (NIPA) and flow-of-funds accounts (FOF) • Godley and Lavoie (2007) introduced the G-L model with 5 sectors: firms, households, government with central bank, banks, and the rest of the world • accumulating flows become stocks • price formation depends on functional income distribution and the real interest rate • Taylor (review of G-L, 2008) modified and interpreted the G-L model, which in turn is generalized and extended here • minor inconsistency: SFC schemes are implemented in discrete-time — macrodynamic closures are usually modeled in continuous-time • this will be tackled with a simplified dynamical systems theory • a shortcoming of the neo-classical paradigm is the absence of money (it assumes neutrality of money) • C. Rogers (1989): neo-classical "monetary theorists are forced to proceed without sound theoretical foundations" • SFC models incorporate real and financial relations for all economic sectors in a consistent way • the SFC approach was created to prevent false predictions from models with only comparative static analysis • G-L do not take into consideration decades of financial innovations • Taylor (2008): possibility of deriving a concise macroeconomic model of price formation, (functional) income distribution, and business cycles, underpinned by strict stock-flow consistency at many levels of disaggregation • system of equations for a closed economy:

firms	households	public sector	banks	nongrowing economy	growing economy
equations describing...
output and investment decisions	income and consumption decisions	government decisions	their duties	stationary state conditions	steady state conditions
costing decisions	personal loans decisions	central bank decisions	determination of interest rates
pricing decisions	portfolio decisions		balance sheet constraints
portfolio decisions
financial implications

• the author will solve the model computationally using the software package E-Views (which G-L used) • the author will run simulation experiments according to scenarios • in a further step a non-linear dynamic macro model will be constructed (which are difficult to analyze)

Post-Keynesian Monetary Economics

W. Godley, M. Lavoie: Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. Palgrave Macmillan, 2006. 576 pages, 87,99€=15¢/page • Introducing a new methodology for studying how it is institutions (firms, banks, governments, foreigners and households) which create flows of income, expenditure and production together with stocks of assets (including money) and liabilities, thereby determining how whole economies evolve through time • any realistic representation of a monetary economy must be grounded in a fully articulated system of national income and flow-of-funds accounts which is so complete that the nth variable is logically implied by the other n-1 • as the financial balances of each sector have exact counterparts in changes in stock variables, historical time is introduced into the basic system of concepts, with asset and liability stocks providing the link between each period and each succeeding period • it is taken as axiomatic that decisions are based on expectations about the future reached under conditions of uncertainty, so for every sector there must exist at least one flexible option or "buffer" over which that sector has no direct control and which adjusts passively when expectations are falsified • for firms the buffer will normally take the form of inventories, for banks and governments it will be stocks of government securities, for households it will be stocks of credit money • accordingly, outside financial markets neither need nor place for equilibrium conditions to bring supply into equivalence with demand • it will almost always be quantities rather than prices which give the signals which keep the economy on track • starting with extremely simple stock flow consistent (SFC) models, the text describes a succession of increasingly complex models, using a conventional narrative style backed up by equations which bring precision to individual propositions • underlying there exists a simulation model constructed with such rigour that, in harmony with its basis in comprehensive accounting, there is always one equation which is implied logically by all the others • solutions of these models are used to illustrate, with charts, ways in which whole economies evolve when shocked in various ways • readers will be able to download all the models and explore their properties for themselves • major conclusion: economies require management via fiscal and monetary policy if full employment without inflation is to be achieved

M. Lavoie: Post-Keynesian Money, Credit and Finance (slides). Univ. of Ottawa, 2008. • Post-Keynesian monetary sub-schools • Neoclassical monetary sub-schools • simplified overview of endogenous money horizontalists (New consensus), monetarists (IS/LM verticalists), structuralists (New paradigm) • main features in monetary economics (features, PK, neoclassical), interest rates, macro implications • 2 kinds (Hicks 1974): overdraft financial system (90% of the world), auto or asset based financial system (some anglo-saxon countries) • simplified neoclassical view:

Central bank balance sheet
Assets	Liabilities
Foreign reserves	Banknotes
Domestic treasury-bills	Reserves of commercial banks

• simplified PK view:

Central bank balance sheet
Assets	Liabilities
Foreign reserves	Banknotes
Domestic T-bills	Reserves of commercial banks
Loans to domestic banks	Government deposits
	(Central bank bills)

• Keynes was still much in the quantity theory tradition • quantity theory: central bank controls the money supply (reserves); velocity of money and money multiplier are constant; money → prices • Radcliffe commission (1959): central bank controls interest rates (and very indirectly money aggregates); velocity of money is unstable; only moderate effect monetary policy → inflation • horizontalists: short-term interest rate is under control of the central bank; there can never be an excess supply of money; central banks cannot exert quantity constraints on the reserve banks • structuralists: market-determined rates → interest rate • central bank interventions are essentially defensive • Eichner (1987): the Fed's purchases or sales of government securities are intended primarily to offset the flows into or out of the domestic monetary-financial system • no relationship between open market operations and bank reserves • monetary policy has to target short-term interest rates • the stock-flow consistent approach is particularly appropriate to model the interaction between financial crises and real crises

M. Lavoie: A post-Keynesian alternative to the New consensus on monetary policy (slides). Univ. of Ottawa/paper presented at ADEK internat. conf., 2002. • New consensus replaces the central bank target money supply (but money supply targeting is impossible in principle and in practice) with a simple interest rate rule (which is more successful to dampen shocks to money demand) • but it reproduces the dogma, that fiscal policy only leads to higher inflation rates and higher real interest rates in the long run • the new consensus is simply a variant of monetarism without any causal role for money • implicit in the New Keynesian model are a natural real interest rate and a natural growth rate • the hidden consensus equation • post-Keynesian alternatives: 1) reject the vertical Phillips curve and replace it with a long-run downward-sloping Phillips curve (Setterfield), or 2) endogenize the natural rate of growth (Lavoie) • similarity with PK critique of natural rate of unemployment • PK: multiple and path-dependent equilibria • the natural rate of growth is endogenous to the demand-determined actual rate of growth (labour force and productivity growth respond to demand growth) • the alternative post-Keynesian model: short-run events have a qualitative impact on long-run equilibria (path-dependence) • monetary policy has real effects beyond its impact on the inflation rate • low-inflation targeting has a negative impact on the real economy → high real rates of interest, low real rates of growth

M. Lavoie: Financialisation Issues in a Post-Keynesian Stock-Flow Consistent Model. Third (Bi)-Annual Canada/US East Border Post-Keynesian Workshop, 2007. • A stock-flow consistent growth model set in the post-Keynesian tradition • the model contains an unusual closure: real government expenditures grow at a rate compatible over the long period with a constant rate of unemployment (it is compatible with an exogenously given “natural rate of growth”) • the model is large and incorporates a detailed description of the household, production, banking and government sectors • focus is on changes in parameters that have a link with the debate over the effects of financialisation • the effects on the following changes is examined: the target proportion of retained earnings to investment; the proportion of profits distributed as dividends; the propensity of households to hold equities; the propensity of households to take new loans as a proportion of their personal income

M. Lavoie: Towards a post-Keynesian consensus in macroeconomics (slides). Univ. of Ottawa, 2008. • Cambridge: macroeconomics without the money • models should be fully stock-flow consistent, incorporate growth, treat money endogenously, incorporate the stock market and show how the stock market value is determined by supply and demand • stock-flow consistent models: • the simple Lavoie and Godley (2001-02) balance sheet • split households (workers, rentiers), add loans to consumers • add government and central bank • focus on portfolio of banks • add housing and mortgages • mortgage-backed financial assets • the SFC approach is far superior to the New consensus approach, which cannot take into account the commitments of banks and other agents

P. Arestis, M. Sawyer: The Bank of England Macroeconomic Model: Its Nature and Implications. The Seventh International Post Keynesian Workshop, Kansas City, 2002. • Presentation of a simplified Bank of England model with focus on the long-run • the Bank of England generally estimates long-run steady state relationships with embedded short-run dynamics and error correction mechanisms • an essentially endogenous view of money is adopted • exploration of the effectiveness of the use of interest rates for inflation control • implications for monetary policy

A.J. Alves, G.A. Dimsky, L.-F. de Paula: Banking Strategy and Credit Expansion: a Post Keynesian Approach. www.ie.ufu.br, 2004. • The balance structure of an individual bank is partially determined by its management decisions, partially by the balance sheet positions of other banks • more aggressive banks will lose reserves to the others and have higher liquidity and insolvency risks • in the business cycle, banks amplify the growth during the upturn and amplify the downturn due to their increase of liquidity preference

E. Miller: A Treatise on the Ecological Economics of Money (abstract). An ecological Post Keynesian approach. www.h4x.ca, 2004. • Post Keynesian monetary theory is a good starting point to understand the relationships between money and economic activity • a fiat money system is compatible with an ecologically sustainable economy (ESE) since it takes little material and energy throughput to create and sustain fiat money, in contrast to commodity or managed money systems • the overnight interest rate should be used to equalize the effective cost of credit over time, rather than being used to target capacity utilization • a global ESE requires a global reserve currency to be used in a new financial architecture that generates stable but adjustable exchange rates between currency areas • a radical reform of the nature of money is not needed to support an ESE • the existing fiat nature of money should be sustained but in a context of new fiscal and monetary policies more compatible with an ESE;   Full Paper. • Post Keynesians find that money is largely endogenous to the demand for credit • money has a negligible elasticity of substitution and a negligible elasticity of production • money legally settles contractual obligations, especially tax obligations • money is a perfect store of liquidity, transferring purchasing power into the future • the demand for liquidity is greater when people's uncertainty about the future is greater • all OECD countries use fiat money, meaning that their national currencies are not redeemable in commodities at guaranteed rates of exchange • by contrast, commodity money, which amounts to to some asset • Keynes' managed money is sort of a hybrid: its supply is managed by the state, but its intrinsic value differs from its monetary face value • fiat money is cheaper to produce and maintain than managed money (low carrying costs) • negative side of money: no market mechanism exists to ensure that everyone can concurrently increase his liquidity by hoarding bank deposits or currence → central bank intervention as a lender of last resort and fiscal intervention to increase indebtedness are necessary • reduced demand from attempts to save deposits correlates to reduced throughput → this is not a positive step towards reducing ecological footprints → this could switch people's preference towards throughput-intensive assets as a store of value • money is not produced more easily by the private sector when its value increases nor do other assets become more attractive substitutes when the value of liquidity increases → involuntary unemployment is a consequence of an economy that uses money with low elasticity of substitution and production • involuntary unemployment as indicator of unfulfilled demand for liquidity • paradox: once people's liquidity demands are met, excess money holdings are directed towards increased consumption or investment spending → greater demand and lower unemployment • it is up to the public sector through growing debts to close the gap and thus reduce unemployment • attempts by many economic actors (people and firms) to concurrently increase their liquidity falls victim to the paradox of thrift (Wikipedia: if everyone saves more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth) unless the government accomodates it through increased production of bills and bonds • NAIRU neither needed nor desirable • financial sustainability = (interest payments + debt redemption) / (government revenue including debt issue) = amount of debt commitments relative to available finance • 3 proposed means of inferring sustainability from stock of debt • a fair interest rate is one that equalizes purchasing power over time in terms of wages • an interest rate above this rate shifts the intertemporal distribution of income from debtors to creditors • the IS-LM(-BP) model cannot serve to model fiscal, monetary, and exchange rate policy in an ESE • problem is that LM is a stock variable and IS is a flow variable, related to each other not in the same period: investment spending on the IS schedule takes time • 6 minimum principles for ecological monetary models: • 1) economy is a process in time • 2) all dynamic processes occur when flows accumulate in stocks • 3) real and monetary processes feed back on each other • 4) unemployment results within monetary economics (because the private sector cannot create net liquidity, since its elasticity of substitution and production is close to 0 • 5) manufactured capital uses natural capital • 6) institutions are a necessary component of any ecological monetary system • monetary circuit: money is created when credit is spent, money disappears when credit is repaid

P.R. Tcherneva: Money: A Comparison of the Post Keynesian and Orthodox Approaches. Oeconomicus, IV, 2001. • Essential difference: "money is neutral" (orthodox) — "money matters" (non-orthodox) • understanding money is perhaps the most crucial task in understanding modern economis • orthodox theory: markets evolved (as a result of people's natural diposition for exchange) long before money came into being (naturally emerged to lubricate markets by reducing transaction costs; first in the form of gold, later paper money) • non-orthodox theory: markets did not exist before money (money is "a creature of the state",; it evolved out of the penal system after introducing fines, taxes, and fees for settling disputes, later standardized by governments) • quantity theory of orthodox analysis: money only determines the nominal value of real variables; if too much money money is chasing too few goods, inflation results • real interest rates are determined by real factors such as productivity and thriftiness; nominal interest rates depend on real interest rates and expected inflation • money can be affected only in the short run when it deviates from the normal rate and fools investment • in a fiat monetary system, governments are believed to use taxation to fund their expenditures: they are tempted to spend in excess by 1. borrowing (supposed to crowd out the private sector at the expense of households) or 2. printing money (is inflationary) • the system is viewed as inherently stable, and fine-tuning is undesirable • inflation is a monetary phenomenon • changes in the money stock are the predominant factor in determining money income (→ a diminished role for the multiplier) • orthodox consequences: divorcing fiscal from monetary policy, independence of the central bank from the fiscal authority • Post Keynesian analysis: governments cannot tax before they spend, and they cannot tax more than they provide to the public • government is the supplier of high-powered money (coins, federal notes and treasury checks) • government deficit spending allows the public to save • the sale of government bonds ("borrowing") offers an interest-bearing alternative to holders of non-interest bearing government money • government borrowing does not cause a rise in interest rates: it allows the private sector to earn interest on hoards • Keynes's liquidity preference theory explains the determination of a wide range of interest rates

W. Mitchell, W. Mosler: Essential elements of a modern monetary economy with applications to social security privatisation and the intergenerational debate. Working Paper No. 05-01, CofFEE – Centre of Full Employment and Equity, The University of Newcastle, Australia, 2005. • G.W. Bush's State of the Union speech, 2005: "By 2018, Social Security will owe more in annual benefits than the revenues it takes in, and when today's young workers begin to retire in 2042, the system will be exhausted and bankrupt" • this was taken as a reason to privatise the Social Security system • similar echoes in Australia with the Intergenerational Report (IGR) • we argue "that the economic basis of the agenda — that government bankruptcy is inevitable given the current demographic trends — is not applicable to a modern fiat currency using economy • only relevant are the political choices that determine the distribution of available real resources across the population — however difficult these might become in the future there is never a risk of government insolvency • we show "that Federal spending is not inherently financially constrained and does not have to be facilitated via prior taxation or debt-issuance • the pursuit of budget surpluses is not only without standing but also likely to undermine the capacity of the economy to provide the resources that may be necessary in the future to provide real goods and services of a particular composition desirable to an ageing population • the social security privatisation debate is driven by macroeconomic misunderstandings • modern monetary economies use fiat currencies, such that the unit of account is convertible only into itself (and not legally convertible by government into gold or any real good or service) → flexible exchange rate policy • it is the only unit acceptable for payment of taxes and other financial demands of the government (which is the only supplier of the currency units) • government budget deficit adds net financial assets (adding to non government savings) and a budget surplus has the opposite effect • in aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending

• macroeconomic principles for this discussion: 1) budget surpluses reduce private savings (increase private debt); 2) budget surpluses do not add to government wealth or their ability to spend; 3) budget surpluses can be achieved only through decreases in non-government savings (increases in non-government debt); 4) budget surpluses reduce aggregate demand; 5) governments run surpluses in order to reduce private savings and reduce consumer demand; 6) alternatively governments run deficits to increase private savings and increase private demand; and 7) the concept of government needing 'finance' before they can spend is never an issue

• government spending is not inherently constrained by its revenues, but facilitated in the main by the government issuing cheques drawn on the central bank • government spends simply by crediting a private sector bank account at the central bank — independently of any prior revenue, including taxing and borrowing • this does not in any way reduce or otherwise diminish any government asset or government's ability to further spend • mainstream economics errs by blurring the differences between private household budgets and the government budget • the popular government budget constraint framework (GBC) in macroeconomics textbooks relates 3 forms of public 'finance': 1) raising taxes; 2) sell bonds; and 3) issuing high money (money creation) • while in reality the GBC is just an ex post accounting identity, orthodox economics claims it to be an ex ante financial constraint • a household, the user of the currency, must finance its spending, ex ante, whereas government, the issuer of the currency, necessarily must spend first before it can subsequently debit private accounts, (should it so desire) — the government is the source of the funds the private sector requires to pay its taxes and to net save • the federal government borrows money from the central bank rather than the public • the fear of inflationary debt monetisation is unfounded, not only because the government doesn't need money in order to spend but also because the central bank does not have the option to monetise any of the outstanding federal debt or newly issued federal debt • the central bank's lack of control over the quantity of reserves underscores the impossibility of debt monetisation • the government deficit determines the cumulative stock of financial assets in the private sector; central bank decisions then determine the composition of this stock in terms of notes and coins (cash), bank reserves (clearing balances) and government bonds

• more macroeconomic principles: 1) taxes reduce balances in private sector bank accounts; 2) the government doesn't actually 'get anything'; 3) the concept of a fiat-issuing government 'saving' in its own currency is of no relevance; 4) payments for bond sales are also accounted for as a drain on liquidity (but then also scrapped)

• the horizontal transactions do not create net financial assets — all assets created are matched by a liability of equivalent magnitude → all transactions net to 0 • the commercial banks do not need reserves to generate credit • what then are the functions of taxation? • the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending → government spending provides the paid work which eliminates the unemployment created by the taxes • the introduction of government taxing and spending into a non-monetary economics that raises the spectre of involuntary unemployment • for aggregate output to be sold, total spending must equal total income • involuntary unemployment is idle labour offered for sale with no buyers at current prices (wages) — it occurs when the private sector, in aggregate, desires to earn the monetary unit of account, but doesn't desire to spend all it earns (other things equal) • involuntary inventory accumulation among sellers of goods and services translates into decreased output and employment → wage cuts per se do not clear the labour market • the purpose of government taxation and spending is to move real resources from private to public domain • unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save • for a given tax structure, if people want to work but do not want to continue consuming (going into debt) at the previous rate, then the government can increase spending and purchase goods and services, and full employment is maintained • while the funds that government spends do not 'come from' anywhere and taxes collected do not 'go anywhere', there are substantial liquidity impacts from net government positions • any notion that government spending rations finite 'savings' that could be used for private investment is a nonsense — the supply of treasury securities offered by the government is always equal to the newly created funds → the net effect is always a wash, and the interest rate is always that which the central bank votes on • budget deficits operationally place downward pressure on short-term interest rates: net government spending (deficits) will eventually, presuming the increased private demand for cash is less than the injection, manifest as excess reserves (cash supplies) in the clearing balances (bank reserves) of the commercial banks at the central bank • only transactions between the federal government and the private sector change the system balance; government spending and purchases of government securities (treasury bonds) by the central bank add liquidity and taxation and sales of government securities drain liquidity • government debt functions as interest rate support and not as a source of funds • government debt does not finance spending but rather serves to maintain reserves such that a particular cash rate can be defended by the central bank

• fundamental principles: 1) the central bank sets the short-term interest rate based on its policy aspirations; 2) government spending is independent of borrowing which the latter best thought of as coming after spending; 3) budget deficits put downward pressure on interest rates; 4) the 'penalty for not borrowing' is that the interest rate will fall to the bottom of the 'corridor' prevailing in the country which may be 0; 5) government debt-issuance is a 'monetary policy' consideration rather than being intrinsic to 'fiscal policy'; 6) the traditional notion of 'debt monetisation' is not applicable; 7) a budget surplus describes what the government 'had done' not what it 'has received'

• the government will always be able to spend the required fiat to provide social security payments for its elderly population — the only 'costs' of keeping old people alive are the 'real resources' they consume; whether the spending required to purchase these resources comes from private or public means is of no particular import to deciding whether a nation can 'afford' these real resources • the debate about whether social security should be private or publicly-provided is not an economic one: it is an outcome of political choice • the concept of bankruptcy has no application to a government which is the monopoly provider of the fiat currency • government finances can be neither strong nor weak but in fact merely reflect a “scorekeeping" role • the standard GBC intertemporal analysis that deficits lead to future tax burdens is also problematic: each generation is free to select the tax burden it endures • we are not saying that government should not be concerned with the size of its deficit: rather the size of the deficit (surplus) will be market-determined by the desired net saving of the non-government sector • it is the responsibility of the government to ensure that its taxation / spending are at the right level that this equality occurs at full employment • our argument: the ability of government to provide necessary goods and services that the private sector may under-provide is independent of government finance • any attempt of fiscal policy 'discipline', with the fiscal drag that accompanies such 'discipline', reduces growth in aggregate demand and private disposable incomes • clearly fiscal discipline “helps maintain low inflation" because it acts as a deflationary force relying on sustained excess capacity and unemployment to keep prices under control • it increases national savings only under fixed exchange rate regimes • the best thing to do now is to maximise incomes in the economy by ensuring there is full employment • if there are sufficient real resources available in the future then their distribution between competing needs will become a political decision • an environmentally sustainable, long-run economic growth will be the single most important determinant in the future

M. Forstater, W. Mosler: The Natural Rate of Interest Is Zero. Journal of Economic Issues, XXXIX(2), 2005. • The natural, nominal, risk free rate of interest is 0 under relevant contemporary institutional arrangements • the sense in which the term natural should be employed does not imply a "law of nature"

L.-P. Rochon, M. Setterfield: Post Keynesian Interest Rate Rules and Macroeconomic Performance: A Comparative Evaluation. Eastern Economic Association Ann. Conf. / Journal of Post Keynesian Economics, 30(1), 2007. • For post-Keynesians, inflation is primarily cost-determined and the result of conflicting claims over income and wealth • because the interest elasticity of investment is small and/or unpredictable, the notion that aggregate demand can be fine tuned is invalid • post-Keynesians reject the existence of a natural interest rate since it is based on the existence of a continuous aggregate production function • 2 distinct post-Keynesian views on the use of monetary policy: 1) the 'activist rule' advocates the use of counter-cyclical interest rate policy to fine-tune economic outcomes and regulate business cycles; 2) the 'parking-it rule' argues that monetary policy is not a reliable tool for regulating output, proposes 'parking' interest rates at a given level and relies instead on fical policy to achieve macroeconomic objectives • Godley and Lavoie: "Fiscal policy is quite capable of achieving full employment at some target inflation rate." • variations on (2): 'Smithin rule' advocates keeping the interest rate close to zero, 'Kansas City rule' recommends nominal rates at zero (with other rates above this to reward risk-taking), 'fair rate rule' recommends setting the real rate equal to the rate of growth of labor productivity (monetary policy becomes neutral with respect to income distribution) • the 3 rules have different implications for the position of the rentier class in society • post-Keynesianism views the economy as a circuit of complex interaction by 'macro-groups' (workers, firms, banks, state, foreign sector) • realization of their objective each depends on other groups: workers ← firms and their expectations ← banks and their expectations ← firms willing to enter into debt • the nominal rate of interest is determined by the central bank as a determinant of income distribution • money supply is determined in the loans market and not a policy choice of central banks • credit and money are distinct from another: credit creates money • the economy is demand-determined — supply adjusts to demand via changes in resource utilization rates and demand-induced variations in the natural rate of growth • no simple or predictable relationship between interest rates and inflation • when set too high, interest rates do have sustained effects on macroeconomic variables (unemployment, growth) • post-Keynesians stress the importance of fiscal policy and the lesser importance of monetary policy • a post-Keynesian monetary macroeconomic model • inflation as a conflicting claims process • a neo-Kaleckian model of growth • labour-saving technical progress is encouraged by squeezed profits • monetary policy by an interest rate operating procedure • each of the 'parked' rules is consistent with an explicit distributional objective (role of the rentier class)

T. I. Palley: Macroeconomics without the LM: A Post-Keynesian Perspective. IMK Working Paper 13/2008, Hans-Böckler-Stiftung, 2008. • Romer's alternative model (2000) to AS/AD-IS/LM lets the central bank set the short-term interest rate • this paper constructs a Post Keynesian model without an LM schedule, fully specifying the banking sector • it replaces the money market with the loan market • that generates an endogenous money supply driven by bank lending • banks becoming more optimistic over the cycle lower their interest mark-up, thus increasing the likelihood of instability

S. Kinsella: Pedagocial Approaches to Theories of Endogenous versus Exogenous Money. 2008. • Contrasting 2 approaches to modeling of money in macroeconomics: the stock-flow consistent modeling approach (Godley and Lavoie 2006) and the neoclassical dynamic general equilibrium modeling approach (Barro 2007) • a pluralist pedagogical approach is possible when thematic overlaps are sufficiently large

H. Matallana: The monetary foundation of the economic circuit and the principle of effective demand in Marx, Keynes and Kalecki. Universidad de los Andes, Bogotá, 2008. • Marx carried out the first full inquiry on the economics of the all-comprising circulation process of capital, first in Grundrisse in the late 1850s, and later in Capital and Theories of Surplus Value in the 1860s and the 1870s • Marx restated Quesnay's tableau économique in terms of the economic categories of a capitalistic society • capital can take the following forms: money-capital, productive capital, and commodity-capital • two substantial aspects are at the center of Marx’s analysis: (a) the monetary determination of the social process of production and circulation of capital (money-capital is a social relation determining the interaction of agents in the monetary production economy alias capitalism); and (b) the notion of the economic circuit as the key economic category for the understanding of the monetary logic of the principle of effective demand • these aspects are also at the center of Keynes’s and Kalecki’s foundation of the theory of the monetary production economy • Keynes and Kalecki state the principle of effective demand without recourse to the classical labour theory of value • substantial differences on the theory of value, capital and money permeate the different versions of post-Keynes-Kalecki heterodoxies • Appendix: Marx's tableau as an input-output-matrix etc.

P. Davidson: 9. Keynes and Money. In: P. Arestis, M.C. Sawyer(eds.): Handbook of Alternative Monetary Economics. Elgar, 2007. • Keynes's conceptualization of money is revolutionary • money should be defined by its essential functions and properties • in all orthodox mainstream theories (i.e., monetarism, general equilibrium theory, neo-Walrasian theory, rational expectations theory, neoclassical synthesis Keynesianism, new classical economics, and New Keynesianism), historical time is treated as if it is irrelevant, based on an Arrow-Debreu-Walrasian general equilibrium framework (all contractual agreements are agreed upon in the initial instant) • the „Big Bang” general equilibrium analysis requires that money is neutral (at least in the long run) • these theories assume either that future events can be known to all economic decision makers with perfect certainty or at least that all future events can be reliably statistically predicted based on calculating probability distributions drawn from existing market data • Keynes: such classical theories are irrelevant to understanding real-world economic problems • money is never neutral: spot and forward money contracts and the civil law of contracts organize production and exchange transactions operative over an uncertain future → a calendar time is specified when the buyer must meet the contractual obligation with money and the seller must deliver the goods at a specified date • money has 2 specific functions: 1) it is the means of contractual settlement and 2) it is a store of value (liquidity) • the more uncertainty the decision maker feels, the more money he will will desire to hold • money can always settle any contractual obligation as long as the residents recognize the civil law of contracts • Keynes: all liquid assets have the necessary properties: a) the elasticity of production of money and all other liquid assets is approximately 0, and b) the elasticity of substitution between liquid assets and industrial products is 0 • Keynes rejected the classical axioms of 1) neutral money, 2) ergodic economic world, and 3) gross substitution (everything is a substitute for everything else) → money matters in the short and long run, and the economic system is moving through calendar time from an irrevocable past to an uncertain (non-ergodic) future, and forward contracts organize time-consuming production and exchange processes, and unemployment is a common laissez-faire situation in a market-oriented, monetary production economy • production takes time — entrepreneurs must have some expectation of possible sales revenues • in a Keynesian model, the budget constraint need never limit either individual spending or aggregate spending at less than full employment — spending is only constrained by liquidity and/or timidity • involuntary employment can occur whenever there are resting places for savings in other than reproducible assets (to find such places, the axiom of gross substitution has to be thrown over) • Keynes: liquid assets are not producible by private entrepreneurs' hiring of additional workers, and when the price of money increases, people will not substitute them for products of industry • in the absence of the axiom of gross substitution, income effects (→ multiplier) predominate and can swamp any substitution effects induced by relative price changes • agents who plan to buy goods in the current period are not required to earn income currently or previously in today's market • as long as the expected monetary return on working and fixed capital exceeds the monetary rate of interest, it pays to borrow from the money-creating banking system to purchase newly produced capital goods • contrary to what classical theory teaches (the axiom of neutral money), money has an impact on the real sector both in the short and the long run • money provides a liquid security blanket for those fearing an uncertain future (where contractual commitments can come due and cannot be met out of the expected cash flow), and money can be created by the banks and lent to borrowers that the bankers deem creditworthy • Keynes: „money plays a part of its own and affects motives and decisions” • the only objective for a firm is to end the production process by liquidating its working capital in order to end up with more money than it started with • suppose a firm starts building up a production process and, during that, the relevant price index falls by 10% but the expected price for selling the product falls by only 5% → in relative real terms the firm is better off, but it is really worse off as the market sales revenue falls by 5%, while its money costs of production are fixed by money contracts • if the fall in the price index were 50% and we had a 45% decline in the sale price, the firm still has a 5% improvement in real terms, but in reality the firm would have to file for bankruptcy • as long as money contracts are used to efficiently plan the production process, production decisions will be affected by nominal values • Arrow and Hahn: if contracts are made in terms of money in an economy moving along in calendar time, then all existence theorems of a general equlibrium solution are jeopardized • money contracts → there need never exist any (short run or long run) rational expectations equilibrium or general equilibrium market-clearing price vector → the general equilibrium analysis is inapplicable • the ergodic axiom permits economists to act as if data are homogeneous with respect to time • in an ergodic world, historical data are useful information regarding the probability distribution of the stochastic process which generated that realization • agents in a non-ergodic world know they cannot reliably know future outcomes → liquidity matters and money is never neutral • Friedman and the rational expectation theorists were able to replace the neoclassical interpretation of Keynes with a technologically advanced, logically consistent, but irrelevant and inaccurate theory • post-Keynesians recognize that Keynes started with a system that accurately reflects the characteristics of the real economic world • motto: it is better to be roughly right than precisely wrong!

Post-Keynesian: Miscellaneous

C. Chiarella, R. Franke, P. Flaschel: Foundations for a Disequilibrium Theory of the Business Cycle: Qualitative Analysis and Quantitative Assessment. Cambridge University Press, 2005. 550 pages, 87,99€=16¢/page;   J.B. Rosser, Jr.: Foreword. • This book represents a significant phase in the development of the "Bielefeld School" • the book compares the Keynes-Metzler-Goodwin (KMG) model to other macroeconomic approaches • Keynes-part: allows for substantial real effects to arise from financial markets • Metzler-part: allows an important role for inventury adjustments • Goodwin-part: emphasizes the importance of income distribution, particularly wage dynamics operating through a modified Phillips curve setup • they abjure the rational expectations assumption in modeling inflationary expectations • assumption of nonlinearity in the investment function • instability arises from the nonlinearities being sufficiently great to trigger Hopf bifurcations and resulting endogenous limit cycle behavior • effort to calibrate the model to fit parameter values relevant to the US economy • introduction of a Taylor rule to endogenize policy feedback (KMGT model) • careful synthesis of realistic dynamic elements and analysis of the sensitivity and stability characteristics

E. Hein, E. Stockhammer: A Post-Keynesian macroeconomic policy mix as an alternative to the New Consensus approach. Hans-Böckler-Stiftung, IMK Working Paper 10/2007, 2007. • Inflation targeting monetary policies, as the main stabilisation tool proposed by the New Consensus Model (NCM), in the short run are only adequate for certain values of the model parameters, but are either unnecessary, counterproductive, or limited in their effectiveness for other values • taking into account medium-run cost and distribution effects of interest rate variations renders monetary policies completely inappropriate as an economic stabiliser • NCM macroeconomic policy assignment should be replaced by a post-Keynesian assignment • enhancing employment without inflation will be possible if macroeconomic policies are coordinated along the following lines: • the central bank targets distribution between rentiers, on the one hand, and firms and labourers, on the other hand, and sets low real interest rates • wage bargaining parties target inflation • fiscal policies are applied for short- and medium-run real stabilisation purposes

J.T. Harvey, J. Deprez: Foundations of International Economics: Post-Keynesian Perspectives (Taschenbuch). Routledge Chapman & Hall, illustrated edition, 1999. 283 pages, 33,99€=12¢/page. • Contributors: Philip Arestis, Robert Blecker, Paul Davidson, Sheila Dow, Bruce Elmslie, Ilene Grabel, John McCombie, Eleni Paliginis, A. P. Thirlwall, L. Randall Wray • chapters feature studies of payment schemes, exchange rate determination, open economy macroeconomics, developing country issues, capital flows, balance of payments constraints, liquidity preference, Fordism and the role of technology in trade

R.P.F. Holt, J.B. Rosser, Jr., L.R. Wray: Neglected Prophets: Paul Davidson: The Truest Keynesian. Eastern Economic Journal, 24(4), 1998. • Paul Davidson is one the best known and influential Post Keynesian economists alive today • he calls himself a Keynesian Post-Keynesian • he has insisted throughout his career that economists should focus on real world problems and that the purpose of economic policy is to help society become more humane and civilized • he is also known for his insistence on adhering to the words and ideas of John Maynard Keynes • this article reviews his contributions to monetary theory, international economics, aggregate supply theory, and environmental economics • finance comes before increases in investment and employment • given uncertainty over the future, money-denominated contracts are the method used to organize production • unemployment is the natural outcome of a money-using, entrepreneurial economy • humans invented legally enforceable, money-dominated contracts in order to deal with the unknowable future → this created for the first time the possibility of involuntary unemployed resources (because it can become desirable to hold money = liquidity rather than the products of labor) • since money is not producible using labor, the fall of demand for commodities produced by labor is not offset when money demand rises • since there is no substitute for money, there is no process to push the economy back toward full employment • money supply can be increased through 1) the income-generating finance process and 2) the portfolio change process (open market operations) • inflation is always a symptom of struggles over income distribution • the floating exchange rate system generates an equilibrium far below world-wide full employment • fixed exchange rates encourage use of longer-term money contracts • each country that experiences inflation should have to devalue its currency • Davidson's aggregate supply function is a function of employment (in money wage units) • Minsky: Davidson's Marshallian, equilibrium approach is inconsistent with the cyclical nature of Keynes' General Theory • Davidson: neoclassical general equilibrium analysis is a special case theory with 3 more axioms • an economy with money contracts, nonergodic uncertainty, and the special (substitutional) characteristics of money may reach reach equilibrium before resources are fully employed and remain stable • Davidson has criticized the "Tobin tax" for not going far enough (given the usual magnitude of a proposed Tobin tax, the deterrent to short-term speculation will be negligible and in all likelihood smaller than the deterrent to real trade flows and arbitrage activities), Say's law does not hold, and the determinants of aggregate demand and the demand for liquidity condition unemployment • Colander: Davidson suffers from a failure to communicate

P. Davidson: Is 'Mathematical Science' an Oxymoron when Used to Describe Economics? Journal of Post Keynesian Economics, 25(4), 2003. • Interpretation of Roy Weintraub's book, How Economics Became a Mathematical Science, to suggest why Keynes's General Theory has never had any real impact on the theories and models proposed by rigorous mainstream economic theorists • there exists now an unabridgeable gulf between modelers and theorists • Arrow and Debreu use a more special (enlarged) axiomatic system than Keynes (ergodic axiom and gross substitution axiom) • irrelevancy of the Arrow-Debreu axiomatic system to the real world • Frank H. Hahn: in the general equilibrium axiomatic system money could play no essential role • the Arrow-Debreu axiomatic system depends on the presence of futures markets and treats time and uncertainty inadequately and contains refutable propositions on exhaustible resources • Hahn: economists "do not understand what they are claiming to be the case when they claim a beneficent and coherent role for the invisible hand ..." • Hahn: "... impossible to take a Walrasian long-run-equilibrium, or for that matter a rational expectations equilibrium, as descriptively satisfactory" • mainstream economic theory has lost any connection with the real world — the mathematical scientist emperor of mainstream economics is without clothes

P. Davidson: 4. Keynes, Post Keynesian analysis, and the open economies of the twenty-first century. In: P. Arestis, J. McCombie, R. Vickerman (eds.): Growth and Economic Development. Elgar, 2006. • Competitive gains by reducing the wages or the exchange rate pass the black queen of reduced profits and higher unemployment to other nations • in an open global economy the only path to global full employment may require every nation to actively and independently undertake a program for public domestic investment to generate domestic full employment • nations simultaneously solving their unemployment problem only by seeking international competitive advantages wil injure all alike • the export-led economic miracles of Japan, Germany, China and India were at the expense of the rest of the world • Keynes: to break out of a global slow-growth stagnation, the correct policy is a 'policy of an autonomous rate of interest ... and a national investment programme directed to an optimum level of employment. ... it helps ourselves and our neighbors at the same time.' • we are doomed to repeat the past errors encouraged by 'the inadequacy of the theoretical foundations of the laissez-faire doctrine • Keynes warns that the law of comparative advantage is only applicable after all nations have implemented domestic demand management policies • most governments have been mislead by mainstream economists to believe that free trade per se is job-creating globally • unfettered capital flows can create seriuous international payments problems for nations whose current accounts would otherwise be roughly in balance • hot money can be so disruptive to the global economy as to impoverish nations who organize production and exchange processes on an entrepreneurial basis • Keynes: 'the movement of capital funds must be regulated' • flight capital drained resources from the relatively poor nations towards the richer ones • increased global employment is possible if a new payments system has a built-in bias that encourages all nations to operate closer to full employment • Thirlwall (1979) developed Keynes' multiplier mechanism into a demand-driven model of economic growth that does not make the classical presumption of continuous global full employment: growth of exports for a nation depends primarily on the rest of the world's growth in income and the world's income elasticity of demand for this nation's exports • if less developed nations have comparative advantage in exports of raw materials with a low income elasticity of demand, while they have a high income elasticity of demand for the manufactured products of the developed world, then they are condemned to relative poverty in a free market → global inequality of income will become larger • if the rate of population growth in the less developed nations is greater than that in the developed world, then their rate of growth of GNP per capita will decline relative to the standard of living of the developed world • but as long as the developed world's population growth is less than its long-term growth rate, these nations can still enjoy a rising living standard • as long as the world permits the free market to determine the balance of payments constraint on each nation, a shrinking proportion of the world's population gets richer, while a growing proportion is likely to become poorer • the slower the rate of growth in income of the rich, the more rapidly the poor are likely to sink into poverty • money is never neutral in an open economy

J.T. Harvey: Post Keynesian versus Neoclassical Explanations of Exchange Rate Movements: A Short Look at the Long Run. Journal of Post Keynesian Economics, 28(2), 2006. • A series of empirical tests are conducted comparing the explanatory power of the neoclassical approach (in particular, purchasing power parity and the monetary model) with that of a long-run exchange rate model based on Post Keynesian premises • the tests use annual data for the $–DM and the $–yen from 1975 through 1998 • it is shown that, despite the shift in time horizon and the biasing of the tests in favor of the neoclassical approach, the Post Keynesian approach still shows a much tighter fit to the historical facts

F. Olesen: Uncertainty, Bounded Rationality, and Post Keynesian Macreconomics. Draft of paper to be presented at the conf. John Maynard Keynes 125 years — what have we learned? Roskilde, 2008. • The rational economic model man • bounded rationality • existence of fundamental uncertainty • 2 macroeconomic world views (table)

?: (A Macro-dynamic Simulation Model for an Open Economy with Post-Keynesian Features). www.anpec.org.br, Associação Nacional dos Centros de Pósgraduação em Economia, Brazil, 2008. • Elements of the post-Keynesian paradigm incorporated in the model: • 1) principle of effective demand • 2) distinct saving propensities of capitalists and workers • 3) mark-up pricing • 4) investment decision based on the Minsky's 2-price-theory • 5) relevance of capital structure for investment and pricing decisions • 6) inflation based on distributional conflict • 7) endogenous money supply • 8) endogenous technical progress á la Kaldor • simulations reproduce the occurrence of irregular but non-explosive fluctuations of the growth rate, stability of the profit rate in the long-term, rare occurrence of a great reduction in the level of real output, increasing importance of financial wealth for the wealth of capitalists, and irrelevance of real exchange rates for the dynamics of the balance of payments • the non-linear nature of the dynamic equations and the occurrence of endogenous shocks make the model path-dependent • for endogenous variables, the general case is a non-equilibrium dynamical path • 7 interconnected modules: • module 1: effective demand • module 2: production, income and technological progress • module 3: income distribution • module 4: inflation and monetary policy • module 5: financial sector and fiscal deficit • module 6: external sector • module 7: balance sheet of private sector

H. Bougrine: Public Debt and Private Wealth. The Seventh International Post-Keynesian Workshop, Kansas City, 2002. • Focus on the links between private wealth and public policy • contrary to common belief, prosperity and "democratic" (i.e. earned) wealth depend crucially on government intervention • inheritance is still a major source of wealth and social power (up to 46% in the USA) • private wealth corresponds to accumulated public debt • "laissez-faire" policy advocates argue: public deficit competes with the private sector for limited available funds → increase of interest rates → lower private investment, attract foreign capital inflow → appreciation of exchange rate → trade deficit • but several empirical studies from several countries have shown no causal relationship between budget deficits and trade deficits • Keynesian analysis: investment expenditures require no prior stock of accumulated savings, but high consumption instead ("paradox of thrift") • investment expenditures are financed by money → where does money come from and how is it created? • money is created ex nihilo via bank credit advances to entrepreneurs who hire labourers → produce goods and services to households and capital equipment for inter-firms exchanges (again creating or destroying money) • once debt is paid back, money is destroyed • when households choose to hold part of their savings as liquidity (insufficient reflux from the private sector), the closure of the money circuit is not possible lest some other sector (particularly the government sector) would incur deficits → provides the additional liquidity to offset the leakage • in the modern monetary economies, liquidity preference is a characteristic → firms remain in debt → deficits are necessary because the firms' sector is unable to finance its production without credit • Wray: "government spending is always financed through creation of fiat money" (cheques issued by the fiscal arm to be accepted by the banking arm of government) • government spending adds to money, taxes subtract from it • in order to have a net creation of money, the government must spend more than it collects (budget deficit) • Wray: "The government does not 'need' the money in order to spend; rather the public needs the government's money in order to pay taxes" • public deficits are a source of wealth for the private sector • in an open economy: S-I=(G-T)+(X-M), "private net saving = government deficit + balance of payment • long-run firms' profits can be sustained by a) negative households' savings (indebtedness), or b) public budget deficit, and/or c) improvement in the balance of payments • particular economic policies have different effects on the wealth of different groups of society: • low interest-rate policy benefits money borrowers (businesses, home buyers) at the expense of rentiers • Wray, Parguez: interest rates variations are determined by the size of the deficit/surplus of the state: the larger the deficit, the lower the interest rate • spending on public infrastructure has disproportionate effects on individuals depending on their location, social status, etc. • well developed infrastructure attracts capital investment → attracts labour, improves employment opportunities • capital investment → technical progress, innovation, productivity increases → higher wages

R. Ashford: Economic Theory Must Include Ownership: Binary Economics and the Case for Broader Ownership (without figures). The Seventh International Post-Keynesian Workshop, Kansas City, 2002. • Keynesianism recognizes that concentration of ownership adversely affects the full employment of existing capacity and growth • Binary Economics as a new conception of economics offers a prescription for establishing an open, competitive and democratic private property system • Binary economics = 2 ways of genuinely earning a living: by labour and by productive capital ownership • broad-based capital acquisition on market principles has a potent distibutive relationship to growth independent of productivity gains and governmental strategies to redistribute demand • "unutilized productive capacity is the flip side of concentrated ownership" • unutilized productive capacity and wealth concentration are based on the fact that capital 1) is independently productive, 2) contributes far more to growth than results from its substitution for labor, 3) routinely returns its investment, 4) is thereby prevented from distributing the consumer income (that would provide market incentives to employ unutilized productive capital) • with a modest reform of existing markets for capital acquisition, substantial growth and more broadly shared wealth can be achieved without redistribution • unused productive capacity is generally marked by diminishing unit production costs and increasing economies of production made unprofiable only by insufficient consumer demand • binary hypothesis: unutilized productive capacity and concentrated ownership are the direct market consequences of faulty market institutions and practices that a) concentrate capital ownership by excluding market participation by non-owners (in acquiring capital with the earnings of capital) and b) thereby monopolize and suppress the true productive capacity • demand for capital investment is derivative of anticipated future consumer demand • principles to establish a binary economy: 1) labor and capital are independently productive; 2) technolgy makes capital much more productive than labor; 3) the more broadly capital is acquired the more profitably it can be employed to increase output (distributive relationship to growth) • in a private property economy capital can both: do much more work and distribute more income and leisure • capital is kept scarce by hoarding and suppressing its true productive capacity, thereby making it more expensive to acquire • to acquire finances, the rich use pre-tax earnings from their capital, collatreal, credit, market and insurance mechanisms (diversify and reduce risk), and a monetary policy to protect property • the same institutions and practices can also work for all people, letting capital pay for its acquistition costs out of its future earnings • corporations would raise funds to acquire capital assets by selling special stock to a Capital Ownership-Broadening Trust, paid for with a bank loan, insured by an insurer, and discounted by the Federal Reserve • the combined cost of binary financing will not exceed

Capital credit insurance	2 %	this might be questioned — but it could be doubled and still provide a competitive interest rate
Customary banker spread	1-2 %
Federal Reserve discounting	0.25 %	reason: monetized credit does not use existing financial savings as source → does not need to earn a competitive compensation rate
Total	3.25–4.25 %

• the broadening distribution of capital ownership and income will increase steadily and thereby provide the basis for growth • each year after the initial cost recovery period of the most productive capital, more binary capital will have paid for itself, distributing capital income to the poorers • with conservative assumptions, in 14 years ½ of annual capital acquisitions will have paid for themselves • with a capital cost recovery period of 7 years and an investment planning horizon of 5 years, increased incentives for increased capital spending might materialize in the 3rd year • operating at less than full capacity, to maintain market share, producers will have to increase productive capacity → growth • Binary Economics will be distributionary, not redistributionary since 1) all transactions are voluntary and 2) no capital income is distributed to its new owners until all costs of capital acquisition and operation required to produce that capital income have been paid;   Binary Economics and the Case for Broader Ownership (revised version with figures). Syracuse Univ. College of Law, 2003

M.J. Radzicki: Mr. Hamilton, Mr. Forrester, and a Foundation for Evolutionary Economics. Journal of Economic Issues, XXXVII(1), 2003. • Hamilton: classical economics is based on Newtonian change, and institutional economics is based on Darwinian evolutionary change • a selected genealogy of economic thought • Arestis (1982): Post Keynesian economics is based on these propositions: 1) economies expand over time 2) uncertainty is unavoidable, expectations have a significant effect 3) economic and political institutions play a significant role 4) realism in analysis is important 5) capitalism creates class-divided societies • agent-based computational economics • behavioral economics (bounded rationality, bounded willpower, bounded self-interest) • evolutionary economics • some fundamentals of system dynamics modeling • building blocks of system dynamics models • evolutionary change and system dynamics (triple loop learning process)

P. Davidson: Strong Uncertainty and How to Cope with it to Improve Action and Capacity. Keynote address, Annual Conf. of European Association of Evolutionary Political Economists EAEPE 2005, Bremen, 2005. • The entrepreneurial system is not as perfect as classical theory describes • the future cannot reliably be predicted • Keynes: labor and product market are not to be blamed for unemployment, recessions, depressions and poor economic performance • classical argument: built in labor market institutional rigidities cause unemployment • Keynes: the axioms underlying classical theory are applicable to a special case only • Keynes's theory requires a smaller common axiomatic base • the classical axioms Keynes threw out: • 1) the neutrality of money axiom — Keynes: money and all other liquid assets matter in both the long and short run • 2) the gross substitution axiom — Keynes: the elasticity of production associated with all liquid assets ≈ 0; the elasticity of substitution between liquid assets and reproducible goods ≈ 0 • 3) the axiom of an ergodic world: all income earners make optimum time preference decisions regarding allocating income between current and future consumption over their lifetimes — they know what they will want to consume every time in the future — but Keynes: the economic system moves through the calendar time from an irrevocable past to uncertain, not statistically predictable, future • Keynes: economic data is not homogeneous over a period of time • Keynes: in an uncertain world, people decide on how much of income is to be spent on consumer goods and how much is instead saved by purchasing liquid assets to transport this store of wealth to an indefinite future time period • Keynes: a 2-stage spending decision making: • 1) time preference decision / propensity to consume: how much of current income to spend on produced goods and how much to be saved • 2) liquidity preference decision (for savers only): choose among the many liquid assets available (savers will look for durable "time machines" with a minimum of carrying and transaction costs) • it is the permanent role for the government to 1) provide whatever liquidity is necessary to maintain orderly financial markets, and 2) assure full employment by assuring that the necessary effective demand is never lacking • Keynes: credit is the pavement along which production travels, and government has to install an institutional arrangement that guarantees financial markets to always operate in a well-organized and orderly fashion • to avoid inflation at less than full employment, nations should adopt a socially acceptable income policy • additional government revenues from increases in tax rate progressivity could be used to provide free public education or other educational opportunities

M. Nichols, O. Pavlov, M.J. Radzicki: The Circular and Cumulative Structure of Administered Pricing. Journal of Economic Issues, XL(2), 2006. • The administered pricing subsector of a Post Keynesian-institutionalist-system dynamics (PKI-SD) core model • mark-up pricing • wage determination and inflation • model test results

F.G. Hayden: The Inadequacy of Forrester System Dynamics Computer Programs for Institutional Principles of Hierarchy, Feedback, and Openness. Journal of Economic Issues, XL(2), 2006. • Claim: the simple idea of modeling relationships among organizations and between systems and the environment like plus and minus electrical charges is inconsistent with institutional economics;   M.J. Radzicki, L. Tauheed: In Defense of System Dynamics: A Response to Professor Hayden. Revised version of the paper presented at the 2007 International Conf. of the System Dynamics Society. 2009. • The behavior of a nonlinear system is due to both the behaviors of its individual parts and the particular connections and interactions between its parts • recursive nature of continuous simulation • structuring of system dynamics models to model hierarchical systems is technically unproblematic • system dynamicists build confidence in models along multiple dimensions (Peterson 1975: 35 possible tests) • fitting to historical time series data is one of the least powerful tests

W. Semmler, P. Flaschel, C. Chiarella, R. Franke: Financial Markets and the Macroeconomy. A Keynesian Perspective (Gebundene Ausgabe). Routledge International Studies in Money and Banking, 2009 (to appear). 416 pages, 93,99€=23¢/page • A Keynesian theoretical perspective on the role of the financial market in macroeconomic outcomes • the role of financial market stability for growth and macroeconomics • critique of theories that see economic disruptions and shocks rooted solely in the real side of the economy • it stresses the financial-real interaction as the major source for macroeconomic instability and disruptions

S. Sparacca: A Post Keynesian macro-model for the Italian economy: empirical results for the real sector. University of Siena, Scuola die Dottorato in Economia Politica, Annual Meeting 2008. • An empirical macro model of the Italian real sector: 39 equations, of which 18 are stochastic • the tracking ability of our model is quite satisfactory, in particluar for the real variables

P. Davidson: Risk and Uncertainty in Economics. Conf. on "The Economic Recession and the State of Economics", London, 2009. • The origin of the current economic crisis lies in the operations of free (deregulated) financial markets • it is the deregulation of the financial system that began in the 1970s in the U.S. that is the basic cause • Greenspan was shocked that his belief that the self interest of lending institutions in a free market led manament to undertake transactions that protect shareholders' equity was wrong • Mainstream theory: free markets can cure any economic problem, while government interference always causes problems • Keynes' liquidity theory of an entrepreneurial economy: government can cure, with cooperation of private industry and households, flaws inherent in capitalist economy (where greed and fear dominate economic decisions) • these 2 theories differ on how they treat knowledge about future outcomes • classical theory: decision makers know the future • Keynes' liquidity theory: decision makers do not an cannot know the future of crucial economic decisions • in an efficient market all decision makers are rational and have reliable information on the probability of events • Arrow-Debreu general equilibrium model's foundation: markets exist today to permit informed participants to buy and sell at any future date • Lucas: at least they have statistically reliable "rational expectations" and their subjective distributions equal the objective distributions in the future • ergodic axiom: the future is merely the statistical shadow of the past (the future is merely probabilistically risky but not uncertain) • investment bankers' computer models presumed the ergodic axiom • Keynes: the uncertainty of the economic future cannot be resolved by looking at statistical patterns of the past, cannot be reduced to quantifiable risks calculated from already existing market data • contracts that can be judicially enforced provide the decision maker with some monetary cost control • by government decision, money is that thing that will settle all legal contractual obligations • firms and households maintain liquidity to avoid bankruptcy • if individuals believe the future to be more uncertain they try to reduce cash outflow payments in order to increase their liquidity • besides money, other liquid assets exist that have some lower degree of money, in that they can readily be resold for money in an orderly financial market • liquid markets make a difference between the preferences of managers (investment bankers) and owners • in a world of efficient financial markets, holders of market traded assets can readily liquidate their position at a price close to the previously announced market price • Keynes: if future outcomes cannot be reliably predicted on the basis of past and present data, then there is no actuarial basis for insurance companies to provide protection against unfavorable outcomes • although the existence of a market maker provides a higher degree of liquidity for traded assets, in severe selling conditions the Monetary Authority must take direct action to provide resources to the market maker • in markets without a market maker, the apparent liquidity of an asset can disappear almost instantaneously • should not security laws and regulations provide sufficient information about markets without a credible market maker?

PKSG Newsletter, Issues 1–4, 1995–1996;   Issues 5–7, 1996–1997

W. Vickrey1996: Fifteen Fatal Fallacies of Financial Fundamentalism. A Disquisition on Demand Side Economics. Columbia University Working Papers, 1996. • Acceptance of these fallacies leads to policies that keep us in economic doldrums with unemployment rates stuck in the 5% to 6% rate:
• 1) "deficits = spending at the expense of future generations (left with a smaller endowment of invested capital)": false analogy to borrowing by individuals → almost the opposite is reality: deficits add to the net disposible income of individuals → more purchases, more investment
• 2) "incentives for individuals to save more stimulate investment and economic growth": the opposite is true: for individuals saving more means to spend less → less income and less saving for vendors and producers, so aggregate saving is reduced
• 3) "government borrowing crowds out private investment": on the contrary, expenditure of the borrowed funds will generate added disposable income → makes private investment more profitable
• 4) "inflation is the cruelest tax": the gain to government and loss to the holders of currency and government securities is limited to the real reduction of non-interest-bearing currency + gain from increment of inflation over what was anticipated → this will mainly affect tax evaders and those who keep cash under the mattress
• 5) "chronic inflation is a reflection of living beyond our means": inflation occurs in the midst of underutilized resources
• 6) "keep inflation away by keeping unemployment at a non-inflation-accelerating level (4% to 6%)": this goal is simply intolerable
• 7) "if only governments would stop meddling, and balance their budgets, free capital markets would in their own good time bring about prosperity": so shocks take place slowly and painfully via unemployment and the business cycle, and low interest rates cannot stimulate enough net capital formation
• 8) "if deficits continue, the debt service would eventually swamp the fisc": reasonable scenarios protect a negligible or even favorable effect on the fisc ("there is simply no problem")
• 9) "the negative effect of considering the overhanging burden of the increased debt cancel the stimulative effect of the deficit": validity depends crucially on taxation system to be used → with a sales or value-added tax as the mainstay, a deficit involving a reduction in tax rates today will have no depressing effect on capital values and will have a fully stimulating effect
• 10) "the value of the national currency in terms of foreign exchange (or gold) is a measure of economic health": via freely floating exchange rates, trade imbalances are brought into line with capital flows appropriate to increasing the overall productivity of capital or by imposing costly disciplines involving needlessly high rates of unemployment (i.e. Maastricht agreements)
• 11) "exemption of capital gains from income tax will promote investment and growth": any increase in disposable income resulting from lower capital gains taxation is likely to accrue to individuals with a high propensity to save → reduction in consumption demand → reduced sales and investment
• 12) "debt could reach levels that cause lenders to balk with taxpayers threatening rebellion": declarations that the economy is fundamentally sound would help
• 13) "income-generating budget deficits result in larger and possibly more extravagant, wasteful and oppressive government expenditures": the issue of activities for the government to carry on is a totally different issue from what the government contribution to the flow of disposable income needs to be to balance the economy at full employment
• 14) "government debt is thought of as a burden handed on from one generation to its children and grandchildren (zero-sum thinking)": the debt is the means whereby the present working cohorts are enabled to earn more by fuller employment and invest in the increased supply of assets, of which the debt is a part, so as to provide for their own old age, relieving children and grandchildren of the burden of providing for the retirement of the preceding generations
• 15) "unemployment is either structural (mismatch between the skills) or regulatory (resulting from minimum wage laws)": apparently a large proportion of those currently officially registered as unemployed, as well as large numbers who are not, are ready and able to take most, if not all, of the kinds of jobs if only there were demand for it

D. Colander: Marshallian General Equilibrium Analysis. Eastern Economic Journal, 21(3), 1995. • This paper discusses Marshall's conception of a general equilibrium system • it argues that conceptually, Marshallian general equilibrium analysis is at a much higher level than Walrasian general equilibrium analysis, and, because it is, it is far more compatible with modern developments in economics than is Walrasian general equilibrium • Marshall's work is not a stepping stone to Walras, but instead a stepping stone beyond Walras • it is consistent with a fundamentally different conception of general equilibrium, one which recognizes that the mathematical formulation of a meaningful general equilibrium model is much more intractable than those with which Walras and later Walrasians dealt • a mathematical specification of Marshall's general equlibrium involves specifying all decisions as a system of multiple nested equations

D. Colander (ed.): Beyond Microfoundations: Post Walrasian Economics (Gebundene Ausgabe). Cambridge Univ. Press, 1996. 284 pages, 59,99€=21¢/page. • Discusses the foundations for a post-Walrasian macroeconomics, carrying the work of Robert Clower and Axel Leijonhufvud to the present • this post-Walrasian approach to macro is neither Keynesian nor Classical, both of which have Walrasian foundations, but it offers an approach to macro in which Walrasian economics is turned on its head • it rejects the Walrasian ad hoc assumptions of the existence of a unique equilibrium and of simple dynamics

D. Colander: Beyond New Keynesian Economics: Towards a Post Walrasian Economics. In R. Rotheim (ed.): New Keynesian Economics/Post-Keynesian Alternatives. Edward Elgar, 1998. • Walrasian macro includes all macro economic work that accepts the existence of a unique aggregate equilibrium toward which the aggregate economy is tending (includes neoclassical, neo Keynesian and new neo-Keynesian economics) • Non Walrasian macroeconomics approaches macro from a fundamentally different perspective: presumption of multiple equilibria → now assuming equilibria ≠ assuming optimality; there are multiple paths to follow depending on a set of strategies • Non Walrasian macro overlaps with one part of New Keynesian macroeconomics that requires extra market coordinating mechanisms • I have given it the name Post Walrasian macro • additional assumptions: • 1) the economy exhibits multiple equilibria and complex dynamics • 2) general equilibrium rational decision making is impossible • 3) existence of multi-layered legal and social institutions prevents from chaotic results • from a Post Walrasian macro denies the existence of a non-contextual microfoundation and hence of a unique representative individual • markets are not given: they are built up by individuals as a method of coordinating individual actions • difference in the formal specification of the aggregate production function: Walrasians: stable and unique x=f(K, L) — Post-Walrasians: alternative levels of output due to coordination failures and multiple equilibria, shifts in aggregate output due to demand spillover effects, x=f(K, L, C), where C stands for the degree of non-market coordination • using the Post Walrasian production function, a decrease in aggregate output can have many explanations without touching the real wage: the market itself is endogenous, as are expectations • now microeconomics needs a macrofoundation

D. Colander: Was Vickrey 10 Years Ahead of the Profession in Macro? Middlebury College, 1998. • Individual rationality does not imply collective rationality • a deficit combined with expansionary monetary policy would push the economy to a preferred short-run equilibrium → creates new patterns of trade, coordination, technology → increasing productivity → long-run equlibrium • if this is right, throughout the 1990s we have been operating at lower output than was possible (the "natural rate" vision has cost society 100s of billions of forgone achievable output) • the natural rate idea started because it fit the data of the 1970s better than did the standard Phillips curve (but never an escpecially good statistical fit and in the 1990s failed miserably) • the natural rate theory should be replaced with the natural range theory (within that range, the Phillips curve is flat, and aggregate demand has little effect on inflation) • W. Vickrey: there is essentially no inflation/unemployment tradeoff • a natural range theory is consistent with the 1970s and the 1990s data • W. Vickrey: unemployment is an immoral way of downholding inflation

D. Colander: A Post Walrasian Explanation of Wage and Price Inflexibility and a Keynesian Unemployment Equilibrium System. In: M. Setterfield (ed.): Essays in Honour of John Cornwall. Palgrave Macmillan, 1999. • The issue of wage and price flexibility could not be resolved between Classicals and Old Keynesians: the alternative assumptions represent fundamentally different visions on how markets work • in a Post Walrasian vision wage and price inflexibilities require no partial equlibrium foundation: in its systemic micro foundation its explanation lies in the theory of institutions underlying the markets • in a functionally complex economy, coordination mechanisms are necessary → accomplished via institutions that place constraints on individuals which limit their range of choice • in Post Walrasian economics, much of the information processing is built into existing institutions, not fully understood by the participants (bounded rationality) • in the Post Walrasian vision, the jump from an individual to an aggregate production function is unacceptable: a complex economy requires trading institutions, conventions, and social mores → market structure is endogenous to the core of the system • coordination issues are implicitly embodied in the specification of the aggregate production function • proposed modification: include a coordination variable C in the aggregate production function q=f(K,L,C) • coordination has its own production function C=f(K,L) • 3 interdependent dimensions of coordination: 1) by the system coordinating institutions, 2) by discretionary actions by players in the market, 3) by discretionary government actions • while unemployment can be eliminated by flexible wages and prices, this will not necessarily improve social welfare • if flexible wages and prices are newly introduced into the example market with existing coordinating institutions, full employment may be achieved, but at a lower level of output

D. Colander: The Death of Neoclassical Economics. Journal of the History of Economic Thought, 22(2), 2000 / Middlebury College Economics Discussion Paper No. 02-37, 2002 • The classification problem; 5 classification criteria • the use of the term neoclassical hinders understanding of the current economics by students and lays people of what contemporary economics is • in popular parlance the term neoclassical is used in 2 quite separate ways: a) to describe the economics from 1870–1930, and b) to describe modern economics in reference to heterodox thinking today • modern economics involves a broader world view and is far more eclectic than the neoclassical terminology allows • neoclassical economics gradually died between 1935 and 2000 • primary attributes of neoclassical economics (NE) in most texts: • 1) NE focuses on allocation of scarce resources at a given moment of time • 2) NE accepts some variation of utilitarianism in a central role • 3) NE focuses on marginal tradeoffs • 4) NE assumes farsighted rationality • 5) NE accepts methodological individualism (the individual does the maximizing) • 6) NE is structured around a general equilibrium conception of the economy (but if it were absolutely central, it would eliminate Marshall) • where modern economics parts company with NE: • 1) interest in allocation died long ago (solved, done) • 2) most modern economists see utilitarianism as past (little operational use) • 3) by the 1930s, marginal frameworks (calculus) were dropped, and set theory and topology were the cutting edge theories, later game theory • 4) bounded rationality, norm-based rationality, and empirically determined rationality are now accepted • 5) complexity theorists challenge the entire individualistic approach in understanding aggregate economy (institutionalists: norms develop and constrain behavior) • 6) although existence of a unique general equilibrium is still predominant, multiple equilibria work is ongoing, and equilibrium selection mechanisms are studied • Solow: the modeling approach to problems is the central element of modern economics • economists today "study the economy and economic policies through empirically testable models" • practical policy models are inconsistent with Arrow-Debreu general equilibrium theory • the applicability of New Classical economics (rational expectations etc.) was always in doubt • by early 1990s, most economists recognized that general equilibrium could not be applied • proposal to call modern economics "New Millenium Economics" • pragmatic modeling will be the hallmark of it

D. Colander: Thinking Outside the Heterodox Box: Post Walrasian Macroeconomics and Heterodoxy. Middlebury College Economics Discussion Paper No. 04-24, 2004 / In M. Setterfield (ed.): Interactions in Analytical Political Economy: Theory, Policy, and Applications. M.E. Sharpe, 2005. • The Post Walrasian descriptor is neither orthodox nor heterodox; a Post Walrasian is simply approaching the issue of multi-market coordination from a perspective different than used by Walrasians (who consider rational agents in an information-rich environment) • the Post Walrasian approach does not jettison general equilibrium • Walrasian work is not illogical — it is not especially relevant to the real issues • the Post Walrasian program attempts to model from first principles • evolutionary game theory and non-linear dynamics made it possible to analyze more complicated interrelationships • advancements in computing power made analysis more dependent on simulation • in an information poor environment, decisions are far too complicated to have unique solutions, so agents cannot be optimizing, but they show purposeful behavior • equilibrium is not a characteristic of the world, but of a model • search for basins of attraction or sustainability instead • in an information-poor environment with transaction costs, the connection between individual actions and higher-level efficiency is very loose at most • only over long periods of time things will likely get better • if an economy with no intervention were efficient, economists would have never developed as a profession • Post Walrasian work cannot be associated with any particular policies • macroeconomics is emerging as a formal science, not as an engineering approach: policy and theory are quite separate

D. Colander: Post Walrasian Macro Policy and the Economics of Muddling Through. Middlebury College, 2003. • The old "holy trilogy" rationality, equilibrium, and greed has been replaced by cognitive awareness, purposeful behavior, and sustainabiliy • upcoming work in behavioral economics, non-linear dynamics, evolutionary game theory, statistical pattern analysis (econophysics), and experimental economics • 3 characteristics of Post Walrasian economics: 1) multiple equilibria and complexity; 2) bounded rationality; 3) institutions and non-price coordinating mechanisms • the conventional discussion of policy remains in reference to a Walrasian model • Walrasian economics: how infinitely rational individuals operate in a rich information environment — Post Walrasian economics: individuals not bright enough to exhibit full rationality, agents changing and evolving • interaction in such a complex environment would be chaos, but institutions and codes of ethics limit agents' actions to a subset that maintains stability • in the Post Walrasian vision, agents are muddling, using rules of thumb, and lacking a firm foundation in what they are doing (so are economic policy makers) • in Post Walrasian economics there is no hope for finding an optimal policy • Post Walrasian work relies less on analytic models, and more on simulations and on agent-based models

P.H. Matthews: Who Is Post-Walrasian Man? Middlebury College, 2004. • What have we learned about the character of economic man? • David Colander advocates the replacement of the neoclassical concepts of rationality, equilibrium, and greed with the post-Walrasian concepts of purposeful behavior, institutions and complexity, and multiple equilibria • purposeful behavior = bounded rationality; institutions = sustainability • premise: a) recent theoretical and computer-based advances hold considerable promise; b) post-Walrasian man (not homo oeconomicus) will animate microfoundations • the post-Walrasian man is embedded in various networks, with interactions with other members (expectations interaction = learning; preference interaction) • what empirical regularities describe how individuals do behave in environments in which interaction matters? • in team production, workers expend more effort than homo oeconomicus would • those who do not contribute their "fair share" are sanctioned, at considerable cost for sanctioneers • the preferences of post-Walrasian man are: nice, punishing, forgiving • this behavior is distinct from altruism by social reciprocity • despite their real wage equivalence, workplace morale suffers more when nominal wages are cut than when the price level rises • but the worker/firm interaction has also to do with conflict, opportunism, and power • equilibrium unemployment as a "worker discipline device" • all of the core predictions of the Shapiro-Stiglitz model are observed in experimental labor markets • the emergence of reciprocal behavior in team production can be rationalized in terms of an evolutionary dynamic based on the vertical and or lateral preferences (i.e. learning) • for some initial conditions, behavior in team production will tend toward no contribution / no punishment

D. Colander: Post Walrasian Macro in Historical Perspective. Early draft for a conference, 2005. • Guiding visions of classical macroeconomics: quantity theory, Say's law, and some long-run insights • these were deemphasized by Keynes, who introduced multiplier analysis • by the 1990s, the economics profession had abandoned Keynesian models to a large degree • disagreement on the role of monetary policy • classicals saw the LM curve as vertical, Keynesians as horizontal: the synthesis was an upward sloping LM curve • the Keynesians owned the short run and the long run was essentially owned by the classicals • the Keynesian economics that emerged in the 1950s and 1960s had only tangential connection to Keynes' initial vision • reality was more complicated: economists have identified at least 10 different types of monetarists and 3 different types of Keynesians • Friedman strongly resisted translating his ideas into IS/LM, but gave in in order not to be excluded from the mainstream debate • just as many classicals felt uncomfortable with the IS/LM synthesis, so too dis many Keynesians: Fundamental Keynesians, Post Keynesians, and coordination Keynesians • the synthesis was missing the central elements of Keynes' views: uncertainty and coordination • the classical dissenters were adding intertemporal elements in the consumption function analysis: Friedman's permanent income hypothesis and Modigliani's life cycle hypothesis • the upcoming Phillips curve (an inverse empirical relationship between prices and unemployment) had no underlying theory, but was added informally • Phelps tried to give macroeconomic a microfoundation, but it could not provide a realistic justification for aggregated curves • Muth's rational expectations: researchers should assume that the agents in the model had the same information as the modelers • as this implied that whatever was expected to happen in the long run should happen in the short run • the New Classicals saw vector autoregression as an attractive alternative to structural models in forcasting • Keynesians were presented as supporting the failed large structural macro models • real business cycle analysis saw all shocks as being caused by real shifts (in supply) rather than in nominal shifts (in demand) • the development of New Keynesian economics was essentially the death of Keynesian economics • the new dynamic stochastic general equilibrium (DSGE) synthesis has been reached: the macroeconomic problem as a gigantic dynamic general equilibrium optimal control problem, with full optimization of individuals and firms, arriving at a solution by using rational expectations and model consistency assumptions • it is generally accepted that one needs various types of nominal rigidities • in an intertemporal equilibrium the effects of most expected policy washes out as individuals adjust their actions to take expected policy into account • modern macroeconomic policy analysis focuses on credibility, credible rules, and optimal dynamic feedback rules • the New Classical/New Keynesian revolution was both an attack on the neoClassical/neoKeynesian synthesis and an extension of it • integrating money into a model of the real economy was a goal of all these approaches • the New Synthesis is far from satisfactory • many of the DSGE conclusions are far beyond what characterizes real world people's reasoning • Post Walrasian economics asks: how do plans of forward-looking agents interact to influence the movements in the macroeconomy? • both Classical and Keynesian opponents argued that economists do not know the correct model: there may be no correct model • Walrasians wonder why there are fluctuations, and Post Walrasians wonder why there is so much stability • both approaches require the agents to have the same information as the modelers • Post Walrasians assume that neither economists nor agents know the right model • behavioral economics — not utility theory — is the micro foundation of Post Walrasian economy • in former times, economists had no tools that could deal with the complexity models in which heterogenous agents with varying expectations interact • Walrasians developed models that assumed rationality, unique equilibria, rational expectations, representative agents and other simplifying aspects • but now advances in computing have made Monte Carlo techniques, agent-based modeling, and nonlinear dynamic modeling feasible

D. Colander (ed.): Post Walrasian Macroeconomics: Beyond the Dynamic Stochastic General Equilibrium Model (Taschenbuch). Cambridge Univ. Press, 2006. 438 pages, 28,99€=6¢/page;   Contents. • Macroeconomics' latest evolution is the development of a new synthesis that combines insights of new classical, new Keynesian and real business cycle traditions into a dynamic, stochastic general equilibrium (DSGE) model • this book contains a new antithesis, which is being driven by advances in computing power and analytic techniques • this new synthesis is coalescing around developments in complexity theory, automated general to specific econometric modeling, agent-based models, and non-linear and statistical dynamical models • this book thus provides the reader with an introduction to what might be called a Post Walrasian research program that is developing as the antithesis of the Walrasian DSGE synthesis

D.C. Colander: Economics (Taschenbuch). McGraw Hill Higher Education, 7th Revised edition, 2007. 928 pages, 62,99€=7¢/page;   Contents

L.B. Yeager, A.A. Rabin: Monetary Aspects of Walras's Law and the Stock-Flow Problem. Atlantic Economic Journal, 25(1), 1997. • Walras's Law: no one thing or group of things can be in excess supply or excess demand by itself • Walras's Law deserves the same status in macroeconomics as the balance of payments in international economics • distinction flows – stocks • Walras's Law must refer to transactions rather than to production and consumption alone or stocks alone • transactions-flow equilibrium means: desired purchases = desired sales • money's distinctness from other goods: buffer-stock role of holdings of money; money trades against all other things • distinguish between transactions-flow demands to acquire money and stock demands to hold it • Clower's distinction between notional supplies and demands and effective (or constrained) supplies and demands • money's role as the universal medium of exchange and as as buffer stocks for its holders • Walras's Law applies only to market transactions (actual and attempted) • demands and supplies of some goods are conveniently treated as stocks, but stock disequilibrium implies transactions-flow disequilibrium in the same direction; the reverse (from transactions-flow disequilibrium to stock disequilibrium) does not always hold • money supply and demand are conceived as stocks

T. Purcell, R. Beard, S. McDonald: Walrasian and Marshallian Stability: An Application to the Australian Pig Industry. University of Queensland, Dept. of Economics, Discussion Papers No. 254, 1999. • 2 types of market adjustments:
1) Walras stability in the pure theory of exchange: prices respond to a change in quantities (cobweb: counter clockwise adjustment)
2) Marshall stability in the theory of production: quantities respond to a change in price (cobweb: clockwise adjustment)

M. Posada, C. Hernández, A. Lopez-Paredes: An Artificial Economics View of the Walrasian and Marshallian Stability. In A. Consiglio (ed.): Artificial Markets Modeling Methods and Applications. LNEMS, 2007. • Experiments with 2 different models of market adjustment: Walrasian and Marshallian instability in an environment with a forward falling supply • Walrasian: volume adjustment according to difference between demand and supply • Marshallian: price adjustment in response to excess demand • the Marshallian stability model captures the observed price dynamics, whereas the Walrasian model does not

Rückbesinnung auf Keynes: Wider die Vermengung von Marshall und Walras. Keynes-Gesellschaft, 2006. • Clowers duale Entscheidungshypothese: erst ermitteln die privaten Haushalte ihre gewünschte Nachfrage nach Gütern und Angebot an Arbeit in neoklassischer Weise, dann treffen sie unter partialanalytischer Betrachtung ihre Nachfrageentscheidungen aufgrund ihres tatsächlichen Einkommens • entscheidender Unterschied zwischen Neoklassik und Keynes' Theorie: die Neoklassiker gehen davon aus, dass auf allen Märkten durch flexible Preise Angebot und Nachfrage ausgeglichen sind, während Keynes zeigt, dass in vielen Fällen die Kreislaufzusammenhänge Arbeitsangebot und Arbeitsnachfrage nicht in Übereinstimmung bringen, auch nicht bei flexiblen Preisen und Löhnen • Marshall unterscheidet 3 Zeitperioden und dazugehörende Preisarten: • 1) Marktpreise in der ultrakurzen Periode, in der Anbieter frische Ware anbieten • 2) die "normalen Preise" bilden sich in der kurzen Periode, in der Produktionsanlagen und Arbeitskräftebestand gegeben sind • 3) "long-run normal prices" aufgrund veränderter Produktionskapazitäten und Produktionskosten in der mehrjährigen Sicht • Keynes konzentriert sich auf die kurze Periode: Ausgleich von Angebot und Nachfrage auf den Gütermärkten durch Anpassung der Produktion • Mengen reagieren schneller als Preise • da die meisten Arbeitnehmer ihre Angebotsmenge nicht reduzieren können, kann Arbeitslosigkeit entstehen • Keynes: die gesamtwirtschaftlichen Kreislaufströme wirken zurück auf einzelwirtschaftliche Entscheidungen, so dass gesamtwirtschaftliches Gleichgewicht erreicht wird • Clower/Leijonhufvud: zentrale Frage nach der Art der Koordinierung • bei Walras sind alle Anbieter Mengenanpasser (Preisnehmer) • aber wie bilden sich die Preise, wenn alle Preisnehmer sind? • Arrow/Debreu: die Ermittlung von Gleichgewichtspreisen für alle Märkte setzt vollständige Information voraus • Walrasianer: es muss auch eine vollständige Menge „kontingenter Zukunftsmärkte” geben • die Allgemeine Gleichgewichtstheorie hat ein walrasianisches System nur als logische Möglichkeit aufgezeigt, nicht als Realität • Clower: eine Märchenwelt hypothetischer wirtschaftlicher Aktivitäten ohne Ähnlichkeit mit einer Ökonomie • die These der Monetaristen, dank rationaler Erwartungen würde die Inflationsbekämpfung selbst kurzfristig keine negativen realen Auswirkungen haben, wurde bald durch die Realität widerlegt • Blinder kritisierte die von Lucas gelegten theoretischen Grundlagen dieser neuen Makroökonomie

D.A. Dalton: "Economics of Keynes" (slides). Intermediate Macroeconomics ECON-305, Boise State University, 2009. • Neoclassical Synthesis: midth 1960s synthesis of orthodox IS-LM Keynesian and classical long-run Growth Economists (with some monetarist ideas thrown in) • Keynesian economics was seen as a special case • Clower and Leijonhufvud criticized that theory as neglecting coordination problems • coordination failures: unemployment and "effective demand failures" arise as disequilibrium situations • Keynes attacked (Walrasian) General Equilibrium analysis • in the Walrasian system, agents are price-takers, quantity-makers; all goods are equally liquid at the equlibrium • in non-clearing markets, distinguish between notional (unconstrained) and effective (constrained) demands and supplies • in the equilibrium, effective and notional demand and supplies are the same • in the Clower/Leijonhufvud critique, Keynes' real mission was to raise the issue of information and coordination problems • in their system, some goods are more liquid than others (not all assets' values can be realized) • Dual Decision Hypothesis: planned (notional) purchases are not made unless planned sales have been realized (made effective) • if effective demand less than notional demand: unemployment without equilibrium • Keynes: quantity adjustments before and faster than price adjustments (reversing Walras) • key elements of the IS-LM model don't agree with Keynes: rigid wages, liquidity trap, interest-inelastic investment, aggregate consumption goods and capital goods (Keynes: only aggregate bonds and capital goods) • second thoughts: inside a corridor, price adjustments dominate and we are in a self-equilibrating market, outside, quantity adjustments dominate and we are in a persistent disequilibrium • as soon as some market does not clear, dominance of quantity adjustments causes multiplier repercussions • modern economies behave not as pure flow models, but as stock-flow economies (stocks as buffers between physical and financial inflows and outflows) • the money-stock of liquid assets is an important buffer used for expenditures when receipts fall

Copyright© 2009, Oskar Fuhlrott, Hamburg