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1 Some reflections on the Scandinavian countries during the crisis a Post-Keynesian case study Jesper Jespersen Roskilde University

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Presentation on theme: "1 Some reflections on the Scandinavian countries during the crisis a Post-Keynesian case study Jesper Jespersen Roskilde University"— Presentation transcript:

1 1 Some reflections on the Scandinavian countries during the crisis a Post-Keynesian case study Jesper Jespersen Roskilde University

2 2 Structure of the paper: 1.Why post-Keynesian economics? Because ‘uncertainty’ and ‘social and institutional changes’ prevent us from having any determinate knowledge of the future  General Equilibrium models seem not to apply to the uncertain understanding of the changing real world economics.

3 3 2. Post-Keynesian analytical features: Like it or not – GDP in money terms and (un)employment are focus points within PKE  The Principle of effective demand rules the roost – but, watch out, effective demand is not what (some of) you might think it is! It is a multi-facetted analytical concept  Context dependent

4 4 My preferred quote from Keynes’s on Methodology: Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time (CWK, XIV: 296) It seems to me … that you [Roy Harrod, jj] do not repel sufficiently firmly attempts... to turn [economics] into a pseudo-Natural-science.....’

5 5 clock-work Market System Power, structures, institutions agentsactors data Jesper’s methodological ’iceberg’ reflexive organism Prediction of marketsystem Understand reality Inspiration: Martin Hollis World 1: World 2: World 3: Two cultures

6 6 The business sector as a whole is at the focal point of Effective Demand: As I now think, the volume of employment is fixed by the entrepreneur under the motive of seeking to maximise his present and prospective profits; (Keynes, 1936: 77)

7 7 Principle of effective demand (I) What factors make the entrepreneurs decide on production (and employment)? Here, one cannot meaningfully separate between short run and long run, because:  if the entrepreneur does not balance his books in the short run (liquidity) and in the medium run (profitability), he/she will be out of business in the longer run  but, if he/she disregard the longer run implications of investment, competition and technology, he/she will be out of business in any case

8 8 Principle of Effective Demand(II) Short run: Expectations, profit and finance Expected aggregate demand (domestic policies and global demand) Profitability & international competitiveness Availability of money and finance/credit

9 9 Longer run: Institutions and politics Welfare institutions: supply & quality of labour Technology and new products: productivity & falling rate of profit Environmental issues: work place, products, externalities & sustainability

10 10 Figure 1: Outlines for the macroeconomic principle of effective demand Effective Demand Expected proceeds from aggregate demand Expected Aggregate profitability: competition Aggregate credit facilitates: the working of the banking and financial system Expected availability of supply factors: labour, capital, technology environmental conditions The business sector ‘acts’ within a frame of agreed institutions: labour market, welfare system, tax structures, financial and political concerns

11 11 Overall picture in rich countries – what is it all about? Happiness and sustainability Of course, I know that Ministers of Finance always talk about growth to fill their coffers But growth alone cannot make them re- elected Hence, we will talk about social ontology before economic growth

12 12 Because: Life satisfaction - only up to a certain point corresponds with GDP/capita 2003/04

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14 14

15 15 The welfare state, does it impede employment and growth?

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17 17 Denmark Sweden Employment rates

18 18 Employment rate Euro15 grew the fastest – 59  65 percent of population, age Denmark grew from 74 to 76 percent of population, age Sweden hardly increased employment (74 percent Why? ‘We don’t know’

19 19 Euro-zone DenmarkGermanySweden Germany0, Sweden0, , Euro130, , , DenmarkGermanySweden Germ.0, Swed.0,925380, EU150,938080, , Growth are very alike

20 20 One percent point a year adds up to 20 points

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22 22 Starting point

23 23 Why did they have different (un)employment paths? Sweden higest growth – moderate fall in unemployment – unchanged employment Denmark (relative) low growth, lowest unemployment – middle increase employment Euro15 (relative) low growth, high (nearly unchanged) unemployment, but the highest growth in employment! That is puzzling!

24 24 Labour market & Welfare Scandinavian countries deviate on: Higher labour market/women participation rates (welfare state institutions) Flexicurity – meaning flexible, but structured hiring and firing and welfare security system (unemployment benefit, and free/subsidized welfare institutions – you don’t loose your social rights, when you get fired)

25 25

26 actual budgetunemplpubl. Empl.part. Rate actual budget1 Unemploynt-0, public empl.-0,122520, part.rate0, ,264390, private empl.0, ,79390, ,266508

27 27 Correlation: : -0, : -0,58 EU13: : -0,49 Denmark: : -0,83

28 28 Sweden

29 29 Inflation? You have to separate between Consumer price inflation Wage cost inflation Scandinavia is more like Southern Europe, than like Germany

30 30 Consumer price harmonization might give a misleading signal due to the single market effect

31 31 Because, no one can beat the Germans in unit labour cost!

32 32 Unless, you have a flexible exchange rate!

33 33 No wonder Sweden is doing well: export led growth Denmark is doing less well; oil & gaz does the trick Balance-of-payments, current account

34 34 Rate of Interest Depends on the Balance-of-payments Especially, if you have your own currency If the competitive position is weak, profits are squeezed and effective demand is weakened  Unemployment Spain is the arch example, but Scandinavian back in the 1970s & 1980s

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37 37 What have we learned? Economics is not a blind machinery Different institutions (Banks) and politics (exchange rate) matters a lot – e.g. the actual situation Compared to the 1930s, the western world has become much richer, closer integrated and, I think, more supportive Hence, priorities may change from growth to sustainability Really, this is a Post-Keynesian story!


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