History of Post Keynesian Economics Its Core Principles

History of Ideas – and of People Keynes was a Cambridge Economist Working in the Cambridge Tradition PK economics could be called Cambridge Economics after Keynes If you don’t understand pre-Keynes economics in Cambridge you can’t understand post-Keynes Cambridge economics {There is no more Cambridge economics!}

Pre-Keynes Cambridge Economics Marshall, but also Lavington, Pigou, Robertson, Hawtrey Monetary-Business cycle tradition Say’s Law tradition – self-stabilising nature of economic system The British Slump –started in 1920s Going off Gold standard Public works – Can Lloyd George Do It?

Pre-Keynes Cambridge Economics All trained by Marshall JR anecdote They all rebelled against Marshall They all rejected self-adjustment Why didn’t price adjustment produce recovery from the slump Kahn Fellowship Dissertation Sraffa challenged Marshallian doctrine of perfect competition –Laws of Returns Joan Robinson produce Economics of Imperfect Competition

General Theory challenges self-adjusting system assumption Theory of Effective Demand Already present in Hawtrey – linked to financing Core Principle > Increasing saving does not provide resources for Investment – Only Increasing Income increases savings Fallacy of Composition

Alternative Versions of Core Principle -- Kalecki Increasing profits share by reducing wages does not increase investment Income Distribution – by income class Degree of monopoly – formally equivalent to propensity to consume Return of Classical price theory – constant wage share – constant costs

Alternate Versions of Core Principles -- Lerner-- Domar Fiscal Budget surplus does not free resources for investment Functional Finance Fiscal Deficits Necessary over time Domar – deficits can stabilise as share of GDP Balanced Budget Multiplier

Rethinking the Classical Tradition Sraffa’s rehabilitation of Ricardo Sraffa’s constant costs & Imperfect Competition Kalecki Income Distribution and Class Marshall’s Long/Secular Period as Classical Long-period theory of employment – Joan Robinson – Richard Kahn Keynesian theory of distribution – N Kaldor

Bastard Keynesians were also at work Marshall is built on process of adjustment driven by relative price determined substitution of factors If wages are low enough a given stock of capital can employ all workers – putty capital If wages are low enough a given stock of money will produce interest rate low enough to produced enough investment that via the multiplier will increase incomes and consumption by enough to provide full employment

Given Capital Stock, Given Money Supply Both are “long-period” adjustment processes Ignore “History v. Equilibrium” Comparison v. Change Daylight saving time Pigou and Keynes on causes of fall in real wages with an increase in output and employment Neo-classical synthesis – neoclassical micro- Keynesian macro

Fighting Bastard Keynesians Prevent bringing Pre-Keynesian theory in through the back door PostKeynesian Distribution Theory Kaldor == macro Kalecki == micro – degree of monopoly

Fighting Bastard Keynesians PostKeynesian Growth Theory – Robinson -- Attack K in production function – marginal productivity – malleable capital -- Sraffa – value of capital not independent of rate of interest, i.e. of its price -- Leon - Pasinetti – Structural Change & Growth -- Garegnani – mec curve is neoclassical -- Roncaglia: join Prices of production to Keynes” Effective Demand .. -- Long Period Theory of Effective Demand {Solow-Swan comes afterwards!}

Fighting Bastard Keynesians – Price theory Attack perfect competition price theory -- Kalecki: degree of monopoly -- Harrod: Dynamic economics -- Sylos Labini: Oligopoly and Technical Progress -- Weintraub: mark up pricing – magic “k” -- Eichner: MegaCorp and Oligopoly -- Andrews – Oxford Research Group

Bastard Keynesians Become Neo-Neoclassics Capital Theory – Parables are never true General Equilibrium – Arrow Debreu Rational Expectations – Lucas Samuelson surrenders -- Elvis has left the building Mainstream disengages Classical Economics Redux Return of the Budget Hawks

New Keynesians Mainstream redefines Keynes – Quantity Constraints, Lemons and Asymmetric information Market Imperfections Ron Reagan and W become major PK economists

Where have all the Bastard Keynesians Gone? Go Back to Monetary Production Economics PK is “understanding” Keynes -- It’s Money Stupid! -- It’s Uncertainty Stupid! PK is endogenous money -- It’s Endogenous Money Stupid! -- It’s the Circuit Stupid! {but already present in Hawtrey, Kalecki and Keynes} There is no money in PK Growth & Distribution Theory

Are Core Principles Enough? Raising Saving, Lowering Wages, Balancing the Budget no good Bastard Keynesian Response says NO -- History versus Equilibrium -- Fundamental Uncertainty -- Mark-up pricing

Monetary Production Integration of Money and Real – Money a “Real Factor” Integration of Micro and Macro Micro decisions Macro outcomes Expectations of the Future Impinge on Present Decisions Financial Fragility - Instability

Monetary Production Money Today v. Money Tomorrow Decisions -- Marx M-C-M’ Revise our theory of Supply and Demand Spot v. Forward Prices “Two Price” Theory {It’s Price Theory Stupid!}

Monetary Production Money rate of interest rules the roost Liquidity Preference Need to Define Nature of Money Define a Monetary Production Economy -- Chapter 17 essential properties -- Chartalism -- state money