This article begins with a review of the two main textbook approaches that had evolved by the early 1960s to incorporate the musings of Keynes: the Keynesian cross from Samuelson’s (1948) introductory textbook and the complete, well fleshed-out model in Gardner Ackley’s (1961) advanced macro textbook. This Keynesian- neoclassical synthesis followed a pattern set by Hicks (1937) by focusing on certain elements of Keynes, while setting aside others. Some potential weaknesses of the specific approach in these models were, at least vaguely, sensed at the time. For example, Hicks had, at least obliquely, mentioned the neglect of inflation expecta- tions. In other cases, the model left out topics that Keynes had treated as important, such as the dangers of financial crises and the role of social norms in wage bargaining, and what these topics implied about the potential importance of multiple equilibria in macroeconomic outcomes. However, the Keynesian-neoclassical synthesis of the 1960s was flexible enough that it encouraged a large body of work. The article will show that this work was based on a style that I call “one-deviation-at-a-timism” (a phrase adapted from Caballero 2010). As I will demonstrate, one-deviation-at-a-time constraints have had real consequences for macroeconomics. For example, they have resulted in lack of attention to financial crashes as a macro topic; they have also resulted in the omission of plausible models with very different core conclusions regarding the effectiveness of macro stabilization.
My concerns can be expressed in the terminology of Thomas Kuhn (1962). What was the dominant paradigm for macroeconomics in the early 1960s? What were its vulnerabilities? What was the resistance to addressing these vulnerabilities? Do these vulnerabilities still remain? I shall address these questions regarding the field of macroeconomics from two intertwined perspectives: my perception of what they were thinking as I began graduate school at MIT in 1962, and my view as I look back on the developments in macroeconomics over the past 57 years.Journal of Economic Perspectives
Mainstream neoclassical economics is hooked on the idea of individual worker-savers as prime movers in capitalist market economies. As workers, individuals choose how much to work, determining the economy’s output; as savers, they determine how much of that output takes the shape of the economy’s capital investment. With banks as conduits channeling saving flows into investment, firms churn inputs into outputs that match worker-savers’ tastes. In this way, the neoclassical world gets shaped by what rational intertemporal utility-maximizing worker-savers wish it to be....Models describe possible worlds. The mathematical question is how consistent the model is (proof). The scientific question is how closely the model corresponds to the actual world that the model purportedly represents (evidence).
MMT features the money-first principle: the state has to first issue its money, either by literally spending it into existence or by having its central bank purchase (“monetize”) assets, for taxpayers to then send it back to the treasury as taxes. Seen in this way, taxes do not “finance” government spending. Rather, they are a means to contain inflation depending on the economy’s real resource constraints (as made clear in Keynes’s [1940] “How to pay for the war”). Similarly, government bond issuance – supposedly collecting loanable funds from worker-savers – is not a means to “finance” government spending either, but an instrument to manage interest rates (as Keynes made clear in his reflections on monetary policy and debt management during WWII)....Rather than using formal modeling, MMT uses institutional analysis to describe actual operations based on institutional arrangements, both formal (law, regulation) and informal (operating procedure).
In the context of the radical Macroeconomics Course I am teaching, I was very unhappy with the material available which tries to explain what Keynes is saying. In attempting to explain it better, I constructed an extremely simple model of a primitive agricultural economy. This model has a lot of pedagogical value in that it can demonstrate many complex phenomenon in very simple terms. In particular, Keynesian, Marxists, Classical and Neo-Classical concepts can be illustrated and compared within our model. We will show the failure of all neoclassical concepts of labor, Supply and Demand, equality of marginal product, value theory — the whole she-bang — in an intuitive and easy to understand plausible model of a simple economy.WEA Pedagogy Blog
Basic macroeconomic theory says that a negative shock to GDP, caused for example by falling exports, can be completely offset by a monetary and fiscal stimulus. China is a good example of that idea in action. What about all the naysayers who predicted financial disaster if this was done? Well there was a mini-crisis in China half a dozen years later, but it is hard to connect it back to stimulus spending and it had little impact on Chinese growth. What about the huge burden on future generations that such stimulus spending would create? Thanks to that programme, China now has a high speed rail network and is a global leader in railway construction.Mainly Macro
Now of course people will say that China is not like an advanced democracy, and it was not part of the global banking network that caused the GFC. But the US and UK stimulus programmes could and should have been larger. Those close to the action tell me that the UK was running out of things to spend more money on in 2008/9, but I cannot help think this amounts to a failure of imagination: it is not as if UK infrastructure is great, there are no flood defence projects left to do etc. Above all else China’s example tells you what a huge mistake 2010 austerity was.
The strongest argument for the adoption of any governmental system is success and the potential for greater success in the future. This is what the history changing Chinese reformer Deng Xiaoping meant when he stated, “It doesn’t matter whether a cat is black or white, as long as it catches mice”. Deng’s adoption of Market Socialism With Chinese Characteristics looked to bring the values of his predecessors into the future by creating an industrial revolution in a primarily agrarian economy which during Deng’s initial period in power had a poverty rate of 88%.
Today, Xi Jinping Thought on Socialism With Chinese Characteristics For a New Era looks to reduce an almost all rural poverty rate of 2% to 0% over the next two years while in the next decade China looks to become a moderately prosperous society for all its citizens. Furthermore, the drive to Create in China seeks to transform the country’s economy from one aimed at efficient production to one where production is increasingly mechanised and guided by artificial intelligence while Chinese entrepreneurs are encouraged to pioneer the next great leaps forward in technological, pharmaceutical and transport innovation on Chinese soil.
At a fundamental level, market socialism combines the individuated penchant for innovation in both utilitarian and luxury sectors that is associated with capitalism while regulating the inflow and outflow of capital in order to re-invest the proceeds of wealth back into the people and infrastructure of the nation. The result is a win-win internal developmental model which since 1978 has helped China to bring more people out of poverty in the shortest period of time in modern history.Eurasia Future
From the beginning, mainstream macroeconomics has been a battleground between the visible and the invisible hand.
Keynesian macroeconomics, represented on the left-hand side of the chart above, has an aggregate supply curve with a long horizontal section at levels of output (Y or real GDP) below full employment (Yfe). What this means is that the aggregate demand determines the actual level of output, which can be and often is at less than full employment (e.g., when AD falls from AD1 to AD2, output to Y1, and prices to P2), with no necessary tendency to return to full employment and price stability. Therefore, according to Keynesian economists, the visible hand of government needs to step in and, through a combination of fiscal and monetary policy, move the economy toward full employment (at Yfe) and stable prices (at P1).
Neoclassical macroeconomists, like their classical predecessors, have a very different view of the macroeconomy, which is represented on the right-hand side of the chart. They start with a vertical aggregate supply curve at a level of output corresponding to full employment. Therefore, according to their theory—often referred to as Say’s Lawor “supply creates its own demand”—aggregate demand does not determine the level of output; instead, it determines only the price level. Thus, for example, if aggregate demand falls (e.g., from AD1 to AD2), output does not change (it remains at Yfe)—only the price level falls (from P1 to P2). On the neoclassical view, the invisible hand of the market maintains full employment (through the labor market) and reverses price deflation (through the so-called real-balance effect) by boosting aggregate demand (back to AD1 from AD2)....
That’s why we need to question the shared utopianism of the two sides of mainstream macroeconomics. What has gone missing from much of the current debate, even outside the mainstream, is that full employment and price stability are consistent with the worst abuses of contemporary capitalism.…
New paper by Lance Taylor, Duncan Foley and Armon Rezai.Naked Keynesianism
Why then does Gov. Brown ignore Keynes’ insights on government or state spending to spur the economy? One reason is that state governments are unable to run deficits in the way that Uncle Sam can. Another is that Gov. Brown is reserving state revenue to repay Wall St. creditors in a downturn. The state issues bonds that these elites hold and push policies that favor their class interests. This is no conspiracy theory, just the everyday workings of public policy in a capitalist society.Counterpunch
A key purpose of demand-led growth theory is to extend the ‘principle of effective demand’ to contexts in which productive capacity is best considered variable rather than fixed. The central idea is that, over any time frame, it is demand that determines output, and demand-led variations in income that adjust planned leakages to planned injections. Once it is acknowledged that capacity is variable, it becomes clear that the adjustment of output to demand, and planned leakages to planned injections, can be achieved not only by utilizing existing capacity more fully, but by expanding capacity through investment....heteconomist
MMTers have solved this one. Others are still floundering, in particular Roger Farmer in this NIESR article on the subject, is all over the place far as I can see (1). So I’ll run thru this vexed question for the umpteenth time....Farmer bills himself as a Keynesian. Ralph reminds us of the answer Keynes himself gave to the question of public debt optimality and how to determine it.
So, to return to the original question, i.e. what’s the optimum amount of national debt or more properly, PSNFA? The answer is “whatever brings full employment”. And that very much ties up with Keynes’s dictum: “look after unemployment, and the budget looks after itself”.Ralphonomics
Over time, it has become abundantly clear that Keynesians made a major strategic mistake to consider neoclassical economics as a scientific counterpart that has to be opposed. Instead of characterizing neoclassical economics had from the very outset as a normative structure, which serves no scientific purpose, they took it on as a science. But no science can ever win the confrontation with an ideological superstructure. The neoclassical attempt is not directed to make genuine scientific progress, but to defend its own position at all costs and even if this cost comes with the high price of inconsistency no one cares. The “general theory,” which Keynes attempted to write, was not ‚general‘ because neoclassicism was not a special brand of economic theory, but a normative structure.Flassbeck argues that neoclassical economics has an ideological bias toward a government-free market based economy and creates a narrative that pictures a "natural" economy based on supply and demand in markets as one without government. Their solution to market failure is therefore to blame government intrusion and to seek to reduce the role of government. Flassbeck observes that this has no empirical basis and is completely ideological.
In my view, neither neoclassical nor Keynesian economics turns out to have the intellectual or political resources to effectively respond to the issues that motivate and resonate within contemporary populism. If anything, they have served to create the problems that have brought right-wing nationalist populism to the fore.
For good reason, both wings of mainstream economics have ceased to be persuasive.
From a broadly Keynesian viewpoint, output is demand determined. This suggests that fiscal policy, by affecting demand, can affect output and employment. At the same time, however, many Keynesians emphasize fundamental uncertainty. Firms’ output decisions depend upon expectations of future demand, and these expectations must be formulated under conditions of uncertainty. It can be wondered how the efficacy of fiscal policy squares with the presence of uncertainty....heteconomist
A final issue: Trump’s “America First” trade policy will inevitably mean that the Trump administration will push trade deals on other countries and even some of the more odious US corporate vulture-style capitalism, such as opening up, or pushing privatisation, of nationalised industries and the public sector in other nations, with predatory US capitalism.The first paragraph is clearly correct since it is the American modus operandi and fundamental to US foreign policy. The second paragraph is therefore problematic, since it is merely a matter of resisting but having the power to do so.
The answer to this: the rest of the world – particularly the Western world – must learn its own protectionism, guard public sectors, and rebuilt its own gutted manufacturing. The rest of the world needs to grow some balls and learn some economic nationalism of its own.
Those interested laypersons and members of the general public who are unfamiliar with econometrics will undoubtably find the following passage hard to swallow given the language. Bear with it until the end, and I will translate for you.…
In layperson’s terms, what all of this says is that Milton Friedman and his co-conspirator, Anna Schwartz’s attempt to claim that the velocity of money was constant, was total bullshit.
So, what then does this all mean to you?
Quite frankly, a lot and it is very important information that the public needs to understand.
Therefore, I’m writing a somewhat comprehensive series on income inequality which will begin with a look at post-World War II policies of full employment up to the 1970’s. Next, I will discuss the OPEC cost shock, the Great Inflation, and the rise of Monetarism. From there, I will discuss the end of full employment, union busting, wage suppression to 1992 and the coming of “New Democrats”. I will then finish with a look at private debt expansion.
So, there’s lots to discuss in the coming weeks.Ellis Winningham — MMT and Modern Macroeconomics
