Eichner's classic A Guide to Post-Keynesian Economics (1978) is still seen as the definitive staging post for those wishing to familiarise themselves with the Post-Keynesian School. Post-Keynesian Economics (PKE) is a school of economic thought which builds upon John Maynard Keynes’s and Michal Kalecki’s argument that effective demand is the key determinant of economic performance. Regular or one-off donations would be greatly appreciated. This policy will imply facing boldly and directly the distributional issues involved. But in the actual world producers do incur obligations in the present to be fulfilled in the future. Elements of New Keynesianism This is the natural corollary of the belief that in a dynamic, expanding economy the ‘income effects’ produced by investment and other means of growth far outweigh the ‘substitution effects’ resulting from price movements—that changes in demand both aggregate and sectoral are due more to changes in income than to changes in relative prices. This is not the case. It begins by distinguishing Post Keynesian economics from other varieties of Keynesianism, and identifying the major methodological concerns of Post Keynesian economics. 75/2016. Wages then become an exogenous variable rather than an endogenous variable. Therefore, some economists claim that Kalecki - who published even before Keynes, but only in Polish at first - was in a way the true founder of PKE, as his analysis was less inspired by neoclassical theory. Skidelsky, 2009). As a result, the theory supports the expansionary fiscal policy. The calculus of probability was supposed to be capable of reducing uncertainty to the same calculable status as that of certainty itself’. Davidson, P. (2011): Post Keynesian Macroeconomic Theory, Cheltenham: Edward Elgar. If everyone reading this gave a small amount, we could keep Exploring Economics thriving for years to come - but 99% of our users don't give. Therefore, some central ideological foundations and political goals of many post-Keynesian economists can also be found in the historical development of social democratic thought and corresponding emphasis on the prospects for non-zero sum game, class-cooperative capitalism. On the grounds of this social determination of behaviour, post-Keynesian theory emphasizes the role of different classes (the main classes being workers, capitalists and rentiers) and institutions in society. Also, it is considered important that central banks act as lenders of last resort. This compels firms to compete by quality and productivity without causing deflation by lowering wages. The conclusion, therefore, is that the instability is inherent in the economic system; it is not something imposed on it by random events external to how the system functions. Any increase in demand has to come from one of these four components. Post-Keynesian economics is a heterodox school that holds that both neo-Keynesian economics and New Keynesian economics are incorrect, and a misinterpretation of Keynes's ideas. Nevertheless, every academic has a specific ideology that he or she employs in the assessment of a theory. Strong boom phases due to optimistic expectations can then be followed by drastic downturns, which are often induced by pessimistic expectations, distributional conflict or financial fragility. On top of that, logical reasoning plays an important role. Post-Keynesian economic was formed and developed by economists such as Joan Robinson and Nicholas Kaldor who believed Keynesian economics was based on disequilibrium and uncertainty, and that challenges the general equilibrium assumptions of neo-classical theory. What distinguishes the Post-Keynesian in this respect is their belief that the foundations for expectations are highly uncertain; while the new-classical economists, no doubt, also place emphasis on the role of expectations, but they think that the foundations of expectations are built on careful analyses along with statistical certainty. This monetary circuit establishes not only a circular flow of income between the main sectors of the economy, but also links economic units like households, firms or governments, to each other over time through their asset and liability structure. Such a view reflects Post-Keynesian view of inflation being the process by which prices rise to deflate nominal incomes, bringing real incomes in line with the availability of real resources. In fact, PKE makes great use of the analysis of microeconomic and socio-political issues that can be found in institutional economics. Before publishing your Articles on this site, please read the following pages: 1. Year of publication: 2013 By a monetary theory of production, “Keynes means an economy in which money plays a part of its own and affects motives and decisions and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted either in the long run or in the short run, without a knowledge of the behaviour of money”. Why post-Keynesian economics, and who were its Cambridge pioneers?Maynard Keynes, Richard Kahn, Richard Goodwin, Nicholas Kaldor, Luigi Pasinetti, Joan Robinson, and Piero Sraffa all started initially, at least in some degree, within the mainstream of their time. Post-Keynesian works, as well as attention received in the media (The Economist, 2013) and in non-expert literature (e.g. Australia: PKs as main organisers of and contributors to the Australian
Society of Heterodox Economics (ASHE) conferences. While logical time can move either forward or backward, historical time can only move forward. On the contrary, individuals always act in a certain institutional context which shapes their beliefs and actions, and connects different classes of agents or types of economic units with each other. Post-Keynesian economic was formed and developed by economists such as Joan Robinson and Nicholas Kaldor who believed Keynesian economics was based on disequilibrium and uncertainty, and that challenges the general equilibrium assumptions of neo-classical theory. You can also suggest material yourself! A sharp distinction must be made between historical and logical time. For example, if the real wage target of workers or unions is in conflict with the profit target of firms, firms will partly pass through increases in nominal wages to prices, which will lead to inflation if the firms have price setting power. Keynesian Economics, Simplified . Stock-flow consistent (SFC) models represent another strand of post-Keynesian formal macro modeling that has become increasingly popular in recent years. This is because they provide vital links between the economy’s historic past and its uncertain future. Money is crucially important, because, as we have known it provides the most essential link between the present and the future— a future, as we have known, is shrouded in uncertainty. We are not, says Prof. Shackle, “The assured masters of known circumstances via reason but the prisoners of time”. King, J.E. These boom and bust phases are regarded as systemic features of monetary production economies that can only be mitigated by certain economic institutions and policies that help sustain economic expectations and activity and thereby reduce uncertainty about the future. An ABM is a computer simulation of many interacting heterogeneous agents, which can be used to study the emerging aggregate outcomes from individual interactions and their feedback on the individual level. John Maynard Keynes published a book in 1936 called The General Theory of Employment, Interest, and Money, laying the groundwork for his legacy of the Keynesian Theory of Economics.It was an interesting time for economic speculation considering the dramatic adverse effect of the Great Depression. Post-Keynesians are united in their rejection of the different versions of neoclassical economics as inappropriate for the analysis of a monetary, capitalist economy. It links main themes in feminist and other works with key elements of a post-Keynesian theory of crisis, and highlights an important methodological sticking point. It was, therefore, left to the Post-Keynesians to tackle the neoclassical notion of the choice of technique based on rational substitution amongst resource inputs— as their relative prices change. While post-Keynesians certainly agree that social structures are ultimately based on human action, they reject the idea that social structures or macroeconomic phenomena can be reduced to the behaviour of individuals. Institutions, economic and political, are of paramount importance in shaping economic events.4 The main characteristics of post-Keynesian economic can be divided into four parts. Individuals, due to psychological reasons and fundamental uncertainty, compare themselves to others and built their decisions partly on rules of thumb and habits. While today many post-Keynesian economists do recognise that infinite growth is problematic from an environmental perspective, it remains the central instrument to achieve full employment and therefore can be seen as a key goal of PKE. The neo-classical synthesis by focusing attention on the ‘marginal productivity’ of un-measurable quantities like ‘capital’— misconstrued the true nature and impact of these distributional issues and as such failed to evolve effective anti-inflationary policy. A key element of new Keynesianism is the role of wage rigidities and price rigidities to explain the persistence of unemployment and macro economic disequilibrium. Equilibrium is possible only in a ‘traditional’, ‘static’ economy— where there are no dynamic influences or variables to influence the future, where everyone knows that everyone also will do. These models thus do have microfoundations, but they are not cast in a formal constrained-optimisation-framework. But during a recession, strong forces often dampen demand as spending goes down. The ABM methodology differs greatly from the representative agent approach, since the state of any single agent over the course of the simulation does not necessarily provide any information about the aggregate state or behaviour of the model, and time plays an important role. Expectations of economic agents are influenced by social conventions and rules of thumb due to fundamental uncertainty about the future. LIBOR, Federal Funds Rate) through monetary policy. PKE rejects the methodological individualism … Nevertheless, New Keynesian economics not post-Keynesian economics, is usually what students learn to be modern Keynesianism. Accordingly, post-Keynesians advocate for methodological holism. Erasmus Mundus Master Programme on Economic Policies in the Age of Globalisation (EPOG): University Paris 13, the University Torino, the Berlin School of Economics and Law, Kingston University London, and the University of Witwatersrand as major partners, Seoul National University, the Federal University of Rio de Janeiro and the University of Massachusetts Amherst associated. This is important from a post-Keynesian perspective, since the object of analysis in PKE is a monetary production economy, as mentioned above. Economic activity is determined by effective demand, which is typically insufficient to generate full employment and full utilisation of capacity. Their analysis made great contributions to the understanding of the Global Financial Crisis. An institutional analysis of the practice of banking and central banking, for instance, might elucidate how credit money is created, how interest rates are determined and how the central bank can affect the short-term interbank rate (e.g. Thereby, aggregate income declines and so does total saving. This approach can also be employed to tell stories about the occurrence of certain economic phenomena, e.g. According to Post-Keynesians, the distribution of income and power is the major concern of most of us—for which there is a constant struggle going on by people to gain greater control on income and power. Hein, E. (2014): Distribution and Growth after Keynes: A Post-Keynesian Guide, Cheltenham: Edward Elgar. New Keynesian economics was conceived in the late 1970s but several strands have evolved in new Keynesian macroeconomic theories/models since the mid 1980s. Keynesian economics focuses on using active government policy to manage aggregate demand in order to address or prevent economic recessions. It is the existence of money, produced partly in response to credit needs, that makes meaningful and significant the distinction in Post-Keynesian models between savings and investment or between discretionary income and discretionary spending. (2012), The Elgar Companion to Post Keynesian Economics, 2nd Edition, Cheltenham: Edward Elgar. While there are some attempts in PKE which investigate the question of the socio-economic and socio-political factors that can lead to certain shifts of overall economic or capitalist regimes, it can be argued that these questions are not the major concern of PK academic literature. You can also join one of the many groups of the international Curriculum Change movement. Correspondingly, PKE provides a rich set of policy proposals which often differ considerably from standard recipes offered by mainstream economics. ... A missing element in the empirical post Keynesian theory of inflation—total credits to households: A first-differenced VAR approach to U.S. inflation. Importantly, most PK economists reject the Marxian labour theory of value or at least regard it as a rather useless concept. The links between PKE and institutional economics are also very strong and maybe even stronger than the links to Marxism. The income generated through the production of new investment goods stimulates consumption demand. The so-called Fundamentalists base their theory mainly on Keynes himself and focus on the topics of the monetised production economy and financial fragility. Post-Keynesian economics can be defined by its particular vision of reality, from which follows its theory of knowledge and its methodology. After Keynes had finished General Theory, he realized that the main difference between his theory and the earlier one (classical) lay in the fact that he (Keynes) recognized and they ignored the fact that expectations of the future are necessarily uncertain. This stands in strong objection to the still dominant neoclassical approach of methodological individualism, which requires that every explanation of economic phenomena has to start from individual behaviour. They are also unanimous in their joint endeavour of building an alternative economic theory that is more suitable for analysing the inherent features of modern capitalist economies, such as unemployment, (financial) crises, business cycles, depressions, technological change, and uneven development. These social structures form the nature of the capitalist monetary production economy that is the subject matter of post-Keynesian economic analysis. Predictive success and the highest possible degree of quantitative precision are not regarded as the main objectives of economic theories, as these may not be reconcilable with the qualitatively complex and changing nature of the capitalist economies. The only knowledge about the future can be at the most in terms of probabilities, because all that can be done is guesswork or speculation or what might happen—but one can never be sure what will happen in future. These have a strong influence on the general price level and hence inflation, as well as on income distribution. Income inequality, for instance, may enter a PK aggregate consumption function based on empirical studies about consumption behaviour showing that rich households have a lower propensity to consume or that poorer households try to adjust their consumption behaviour to the next higher social income class. For example, many institutional economists reject the formal and econometric modeling approaches that can be found in PKE. When people save, they spend less, therefore businesses realise less revenue and reduce investment. Post-Keynesian Economics, Criticai Realism, and Social Ontology 162 STEPHEN PRATTEN 8. The first is involuntary unemployment, reflecting both the demand and supply-side shocks to the economy. Another case in point would be the endorsement of labour market institutions that foster collective wage bargaining and establish a nominal wage anchor that no one can undercut. However, there are still puzzles to be solved such as how financialisation relates to neoliberalism. PKE studies a wide array of economic fields ranging from short-run macroeconomics (unemployment, economic output and inflation), long-run macroeconomics (growth and distribution), monetary economics, finance and the international monetary system to microeconomic approaches to the theory of the firm, theory of consumption, exchange rate theory, financialisation, and much more. values, money, consumption norms, labour market regulations) and social organisations (e.g. King, John Edward (Ed.) Post-Keynesian economics is part of heterodox economics more generally, such as Classical, Marxian, Old Institutional, Evolutionary Political Economy, Social, Feminist and Ecological economics, which provide alternatives to neoclassical or orthodox economics. Mainstream economists therefore use the concept of a perfect optimising agent. Again, according to Post-Keynesians, in the central core or the economy, where much oligopolistic firms dominate prices are administered through the technique of “mark up” over labour costs per unit produced. Oxford University Press. The job of the ‘auctioneer’ is to continue to call out new sets of prices for everything being traded until prices are found that will clear all markets simultaneously. Even though the modern banking and other credit institutions are designed to accommodate discretionary spending decisions; it is possible through central banking actions, to make them less so. Keynes wrote The General Theory of Employment, Interest, and Money in the 1930s, and his influence among academics and policymakers increased through the 1960s. This is so because it opens the door to power, to wealth, to attention, to status and prestige and to all things that humans value along with and often to a greater extent than consumption. However, that does not mean that in PKE all theoretical assumptions are sought to be strictly proven by inductive reasoning, i.e. the financial crisis 2007-08, as a result of more long-term structural institutional changes in the financial sector. PK contributions to the financialisation debate highlight its negative effects on investment, income distribution and financial stability. PKE employs research methods that correspond to the principle of holism. With the increase or decrease in the government expenditures or some other form of discretionary spending—the banking system, either activates or sterilizes the idle balances or demand for cash, except when the downturn is so severe as to impair the confidence in the financial structure (due to progressive decline in asset values) leading to liquidity crisis. This view can be summarised by the rule of thumb that it is better to be roughly right than precisely wrong. This approach is strongly opposed to the epistemological viewpoint of instrumentalism, which does not care about the degree of reality reflected in core assumptions and only seeks to achieve correct predictions. The general objective of economics in such a view is to tell plausible stories about the functioning of the economic system in the real world starting from stylised facts. Economics Institute of Bard College at Bard Digital Commons. In contrast, PKE uses the concept of satisficing agents. Summary: Classical vs Keynesian Economics • Classical economics and Keynesian economics are both schools of thought that are different in approaches to defining economics. This book analyzes Keynesian foundations of post-Keynesian economics, focusing on how uncertainty and liquidity revoke Say’s law. This book brings the story up-to-date.Of all the subgroups within heterodox economics, Post-Keynesianism has provided the most convincing alternative to mainstream theory. Changes in adaptation of resources to demand can come about only through the process of investment which, in turn, depend on expectations about the future which are rarely perfectly fulfilled and, therefore, have to be laid down (or anticipated) possibly with a wide margin for error. Recommended Citation. These include stagnation, excessive inflation or deflation, recessions, financial and economic crises, among others. US: University of Massachusetts Amherst, the New School for Social Research, New York, the University of Missouri, Kansas City, and at the University of Utah, Salt Lake City. Therefore, empirical regularities can change as well, so that economic theories cannot be regarded as universal laws. It is the elasticity of the credit of the banking system (because it either activates or sterilizes idle balances depending on demand for loans) that prevents the full impact of any changes in economic activity from being felt on the real side of production. Rob van Tulder, Maria Dafnomili (PhD re…, "Instructors: Asgeir B. Torfason and Elham Saeidinezhad; Teaching Assistants: J…, International Review of Applied Economics, European Journal of Economics and Economic Policies: Intervention, International Journal of Political Economy, North America: Levy Economics Institute, annual Hyman P. Minsky conferences in New York, international Post Keynesian conferences in Kansas City, and Minsky summer seminars in Annandale-on-Hudson, NY, South America: Associação Keynesiana Brasileiro (AKB), annual conferences. employment equilibrium is the sole object of post Keynesian work on money; nonetheless it is clearly important, and we shall return to it below. What this means, according to Prof. Davidson is that “the new-classical economists are simply replacing the certainty about the future which was built into traditional classical economics with the concept of—a known probability distribution”. This follows because the struggle to exercise control over the money and competitive struggle among organised groups each seeking to obtain both controls and a larger share of national output for members of the group. Content Guidelines 2. Although economic models are always a highly simplified representation of actual causal mechanisms, they should ideally capture key aspects of reality as they exist. Therefore, it is but natural that if we really want to understand what happens in the economy, we must understand the institutions that shape and influence the collective human behaviour. We have decided to offer our learning materials free of charge because we believe in an open, pluralist economic science that is available to everyone, worldwide. It follows that individuals cannot act perfectly rationally as understood by mainstream economists. In short, money is not neutral, it is not a mere convenience, something that facilitates the real process of exchange. Post-Keynesian economics (PKE) is an economic paradigm that stems from the work of economists such as John Maynard Keynes (1883-1946), Michal Kalecki (1899-1970), Roy Harrod (1900-1978), Joan Robinson (1903-1983), Nicholas Kaldor (1908-1986), and many others. Its most important analytical feature is the integration of behavioural equations derived from PK theory into a framework of rigorous accounting rules (note, however, that the SFC framework is not bound to one specific school of thought). Theories that fail to take into account basic accounting identities and their substantive economic consequences are certainly regarded as flawed by post-Keynesians. Although by name they are very similar, post-Keynesianism is quite different from Old Keynesianism as well as New Keynesian economics. This depresses investment and consumption expenditures, invalidates income expectations and induces a period of debt defaults and economic crisis. According to Keynes, the classical economists assumed a kind of certainty of knowledge which, simply did not exist, and the new-classical economists held that “facts and expectations are assumed to be given in a definite and calculable form ; and risks, of which, though admitted, not much notice was taken, were supposed to be capable of an exact mathematical computation. PK theory itself is in principle compatible with a wide range of ideologies or goals. This methodological treatment gives rise to the distinction between the Post-Keynesian long-period and short-period analysis. because of currency depreciations or commodity price shocks. However, unlike neoclassical theory, assumptions about individual behaviour typically involve norm-oriented behaviour that is shaped by social institutions and social contexts. A monetary economy, Keynes argued, is not just a more complicated barter system. Post Keynesian Economics has at its core the concepts of effective For example, the GFC has generally reaffirmed the post-Keynesian insistence on the important role of money and finance for economic activity. Eduardo Fernández-Huerga, Department of Economics and Statistics, University of León, Spain. The sense in which Keynes uses the term is that in which the prospect of a war is uncertain, or the price of copper and the rate of interest twenty years hence, or the position of private wealth holders in the social system is uncertain. First, while PKE stresses the importance of realism - trying to tell relevant stories about the economy, based on real facts - mainstream economics follows the view of instrumentalism - which does not care about the degree of reality reflected in their assumptions, as long as they will allow precise predictions. This approach has been described as “holism”. A natural corollary of the above feature of the Post-Keynesian economics is that it accepts and recognizes the existence of multinational corporations, on the one hand, and perhaps less powerful national trade unions, on the other. Likewise, theoretical hypotheses that are derived from PK theories may be empirically tested through econometrics. A relatively new development is the combination of SFC models with agent-based models (ABMs) in order to incorporate more diverse economic agents into post-Keynesian models. The contributions in this field range from institutional and descriptive analyses on the micro- and meso-level to econometric studies and formal macroeconomic models. Paul Samuelson. GDP growth or inflation) of a dynamic economy that is subject to structural change. 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