Friday, March 27, 2015

On being a 'real Keynesian'

1965: when we were all Keynesians (wink, wink, nudge, nudge, say no more)

Recently the Boston Globe had a piece on the Leontief Prize shared by Duncan and Lance, but emphasizing to some extent that while the winners are true heterodox economists (for a personal definition of heterodox go here) and 'real Keynesians' one would think, some well known progressive economists, like Krugman, are not 'real Keynesians.' In many ways, the issue has been discussed here before (or here).

Keynesian is one of those labels that is imbued with several meanings, and there are, not surprisingly, many prefixes to denote the particular Keynesian tribe, e.g. neo-Keynesian, post-Keynesian, New Keynesian, Old (Neoclassical Synthesis) Keynesian, sometimes referred in less polite fashion as Bastard Keynesian, classical-Keynesian (Sraffian-Keynesian?), etc. And those are just the ones related to theory, since policies have been referred to as Military Keynesianism or more recently weaponized Keynesianism, Social Democratic Keynesianism, Pragmatic Keynesianism, and even Republican Keynesianism. I've been told that Naked Keynesianism is a thing. Semantic saturation may imply that the very meaning of Keynesian is too vague to have any clear connotation. Plain Keynesianism is an avis rara.[1]

One way in which Keynesianism is understood is related to its policy implications. The notion that fiscal expansion might be needed to get out of a recession. An idea not discussed in the GT, beyond some vague reference to the socialization of investment. In that sense, there is little doubt that Krugman, and others like him (e.g. Brad DeLong, Simon Wren-Lewis if we stick to those with prominent blogs) are Keynesians. New Keynesians are for fiscal expansion in the particular situation of the zero bound interest rate, in which monetary expansion cannot be pursued. And they have been consistently against austerity policies in the US and in Europe, and political allies of many radical or heterodox Keynesians.

But if policy is the yardstick of Keynesianism, then one must remember that Keynes supposedly argued in the 1944, after a famous Washington meeting with many Keynesian economists in DC, that he was not a Keynesian.[2] Meaning he was not for further stimulus after the war, presumably because unemployment was not going to be a problem. In the same vein, many heterodox Keynesians are often for contractionary policies, including in situations in which the economy is far from full employment. Lance defended in the QA session after the prize that Brazil might need fiscal adjustment since it has an external problem.[3] These would be anti-Keynesian views, if the fiscal expansion policy proposition is the true meaning of Keynesianism.

But obviously the policy perspective, as important as it is, is only a narrow definition of the meaning of Keynesianism. The essential point that Keynes was trying to prove was that, even with price flexibility, the economic system does not have a tendency to the natural rate of unemployment (or the level of full employment, associated with price stability). He was even very clear that the very notion of a natural rate -- Keynes actually referred to the analogous natural rate of interest rather than the unemployment one, which was only discussed by Friedman in the late 1960s -- was a bad idea. By that measure, Keynes himself failed, since the acceptance of the marginalist investment theory, with investment inversely related to the rate of interest, implied that there was a sufficiently low rate of interest that would bring investment to equilibrium with full employment savings. However, once one gets rid of the neoclassical theory of investment, the possibility of persistent unemployment, of unemployment equilibrium (not disequilibrium) is perfectly possible. The system is inefficient and the cause is not an imperfection.[4]

Note that by this definition Keynes himself failed to provide a full explanation of why the system does not tend to full employment, since the notion of a natural rate was still part of his model. In this theoretical sense, Keynesian ideas had to be fully developed later in order to get to the 'real Keynesian' notion of unemployment equilibrium. An many heterodox Keynesians still fail to get that point. Uncertainty, which is often referred as one of the reasons for persistent unemployment, per se is not a cause for the system not going to full employment. It's just another imperfection. In this case, the group of economists that are 'real Keynesians' is narrow indeed. And it  shouldn't be a surprise that many economists that think of themselves as heterodox do like Say's Law, at least in the long run.[5]

I must emphasize that the fact that the number of economists that understand effective demand is very narrow (and even narrower if you add those that get the old classical political economy theory of value and distribution; are we counting 'real Marxists' too?), and that theoretical confusion and error are widespread is not new. The profession was always dominated by a vague and somewhat incoherent defense of the free market forces. Most Ricardian economists were not 'real Ricardians' and to this day readers of Adam Smith miss the point.[6] The combination of factors that allowed for the Keynesian policy consensus between the Depression and the collapse of Bretton Woods were peculiar, and involved not only the fear that capitalism would collapse, but also the existence of an alternative system.

In one sense, I do agree with the message of the Boston Globe piece. The theoretical definition of Keynesianism takes precedence and is more relevant. Without a solid theoretical result, alternative to the mainstream, there is no basis for an alternative policy prescription. Imperfections may allow for Keynesian policies, but they may also suggest that the solution is neoliberal policies of eliminating imperfections (e.g. rigidities in the labor market). 'Real Keynesians' are truly important. On the other hand, it is important to notice that in the age of austerity, the policy dimension of Keynesianism becomes more relevant.

So I'm increasingly favorable to the Keynesians, that might not be 'real' (heterodox), but that promote Keynesian policies. We need more of those around, even if they are not 'real.' Particularly in government positions. For example, the Keynesian economists in the Kennedy-Johnson administration were certainly not heterodox, and their view of the space for Keynesian policies was built on the notion of rigid wages, and a stable Phillips Curve. All very problematic from a theoretical point of view. But they did the tax cut, the war on poverty and Medicaid/Medicare programs. With enemies like these who needs friends?

[1] Wynne Godley used to say that he was just Keynesian. No prefix.

[2] I'm exaggerating a bit. In the meeting he argued against Abba Lerner's functional finance, even though later he suggested he liked the book in which Lerner's ideas were fully developed. There are many accounts of that meeting, and not all consistent. In one of these, Evsey Domar, who was seating next to Lerner supposedly said to Lerner regarding Keynes non endorsement of expansionary policies that: "he ought to read The General Theory." The implication is that Keynes was not a Keynesian, at least not under all circumstances.

[3] This view has been defended by many economists that are certainly not neoclassical. Some New Developmental economists suggest that fiscal austerity to control inflation, and depreciation to promote growth are required in the current circumstances in Brazil. A similar view is held by some, arguably heterodox, economists in Argentina and Mexico too. I have discussed extensively before why I think this is a misguided policy (e.g. here or here).

[4] Hence the relevance of the capital debates. Keynes suggestion that the system did not have a tendency to full employment in chapter 19 of the GT, and his arguments there are based on the effects of lower wages and prices on income distribution and on debt. These arguments suggest that the natural (full employment) rate might be a weak attractor of the system. The capital debates eliminate the existence of the full employment rate as an attractor.

[5] And it's not just the heterodox that are often confused, and provide only partial and incomplete critiques of the mainstream. That's even more common among the mainstream. It's particularly true of the younger generation of mainstream economists. Most neoclassical economists do not understand neoclassical economics. I would suggest that reading Piketty gives you a sense of how little neoclassical economists understand neoclassical theory. The same would happen, for example, if one reads Noah Smith's blog. On this go here.

[6] Brad DeLong dismisses Marx because he embraced the labor theory of value (LTV), but sings the praises of Adam Smith, as if he didn't also use the LTV. See here.

Thursday, March 26, 2015

A Woman on a 20 Dollar Bill

A woman instead of a flawed president

I'm not a huge fan of the sociological discussions about the symbolic role of money. As readers of the blog would know I tend to follow a cartalist or chartalist view of money -- most discussion in the blog have been also associated with the cartalist conception of the role of dollar hegemony (here) -- which basically means that the origin of money is power. Keynes said in his Treatise on Money that: “money of account comes into existence along with debts, which are contracts for deferred payment, and price lists, which are offers of contracts for sale or purchase.... [and] can only be expressed in terms of a money of account” (p. 3). It's a unit of account, and someone has the power to decide what money is.

Having said that, it is true that money, as any other symbol of power, has implications for the functioning of society that go beyond the merely material ones related to the reproduction of society. Now there is a campaign to put a woman on the 20 dollar bill, replacing Andrew Jackson (better than the previous campaign to put Reagan in Hamilton's place). You can vote in their website, not that this would have any official role. You must choose three, but my real choice was Frances Perkins, first woman in the cabinet (FDR's labor secretary), and in many respects the main force behind some of the social policies of the New Deal.

Krugman is not a real Keynesian

From The Boston Globe:
Keynes’s insights have enormous practical importance, according to Lance Taylor and Duncan Foley of the New School. Temperamentally opposite — Foley a brilliant theorist, Taylor a pragmatist influential in developing nations — they jointly received the Leontief Prize for Advancing the Frontiers of Economic Thought at Tufts University’s Global Development and Environment Institute on Monday. But isn’t Keynes now mainstream? No, say Foley and Taylor. The mainstream still sees economies as inherently moving to an optimal equilibrium, as Wicksell did. It still says demand causes short-run fluctuations, but only supply factors, such as the capital stock and technology, can affect long-run growth.
Read rest here. Not a surprise for the readers of this blog.

Wednesday, March 25, 2015

The Gold Standard and the Depression

I have been teaching on this topic this week. One of the accepted views on the Depression is that countries that depreciated earlier recovered faster from the crisis. The classic paper by Eichengreen and Sachs sort of established the result.* The notion is the traditional one. Depreciation leads to lower prices in foreign currency, increased competitiveness and higher exports. Graph below shows the correlation between depreciation (since the exchange rate is measured as the foreign price of domestic currency, lower rate means depreciation).
The indexes show the difference between the exchange rate and export volumes in 1929 (100) and 1935. So in 1935 France had not left the Gold Standard and the exchange rate remained at 100, while the exports were close to 50% of their 1929 level. There seems to be a clear negative relation between the exchange rate depreciation and export performance. However, note that in the United Kingdom a depreciation of about 40% implied exports at around 75% or so of the 1929 level. Only Norway and Finland seem to have higher exports in 1935 than in 1929. This was not an external demand led recovery.

This suggests that if depreciation had a role it was more likely related to the space that breaking with the Gold Standard rules provided for domestic authorities to pursue expansionary policies at home. Note that in this context, the depreciation, as much as higher tariffs and other trade related policies, are less relevant for their role in stimulating external demand, than by their role in protecting domestic production.

In the US the group of economists that were in favor of the depreciation of the dollar (see the letter by Harvard economists J. Raymond Walsh, Lauchlin Currie, John B. Crane, John M. Cassels, Robert Keen Lamb and Alan R. Sweezy in support of FDR's depreciation policy in 1934; and yes that includes Currie, later advisor to Eccles, and Paul's brother Alan, a Keynesian, not a Marxist), were also in favor of domestic fiscal expansion, which was at the end of the day Keynes point too. You can see Keynes arguing why the abandonment of the Gold Standard would be a good thing here, at the beginning of John Kenneth Galbraith's documentary.

This is still an important point, since there are significant lessons, at least it seems to me, for the European periphery story, in particular Greece. Depreciation alone cannot do the job. But a combination of import substituting policies, to reduce external constraint problems, with expansionary demand policies might work.

* There are also issues related to the role of the Gold Standard in causing the Depression, since the crisis was international, and many authors think that this suggests that it must have international causes. Hence, the Monetarist contraction story, or the Keynesian consumption collapse story (including the more radical version in which income distribution plays a role) would be incomplete. In this view, the relatively high rate of interest, related to the not credible inter-war Gold Standard, would be the cause of the depression. This view, as I noted before, seems closer to Keynes' Treatise on Money than his GT.

Tuesday, March 24, 2015

Minsky's puppet explains the crisis

Monty Python's Terry Jones' documentary Boom Bust Boom with a Hyman Minsky puppet. What's not to like?

PS: The puppet at the end represents Hyman Minsky.

Monday, March 23, 2015

Taylor and Foley recipients of Leontief Prize live

2015 Leontief Prize went to Duncan Foley and Lance Taylor for their work on "Macroeconomics in the Age of Climate Change." Watch their talk live starting at 5:30 Eastern Time today here.

PS: If you missed it, they will post later video footage. Meanwhile here are the interviews with last years winners Angus Deaton and James K. Galbraith.

Sunday, March 22, 2015

New Book: The Encyclopedia of Central Banking

New book on central banking, edited by L-P Rochon & Sergio Rossi, has recently been published. I have two chapters: 1. on Classical Dichotomy, & 2. on Dollar Hegemony.

See here.

PS: Posted here with an entry on Bretton Woods by Omar Hamouda.

Saturday, March 21, 2015

On the blogs

Architects of Miscalculation: Behind the White House’s Sanctions Against Venezuela -- Mark Weisbrot on why "Washington is still some ways away from the hemispheric equivalent of Nixon’s trip to China in 1972."

Greek Debt: Do the Right Thing -- Dmitri Papadimitriou on the ongoing Greek crisis.

How to Raise Wages -- Lawrence Mishel and Ross Eisenbrey, from EPI, on policies that strengthen workers' power to bargain for higher wages.

Suzanne de Brunhoff (1929-2015) -- Well-known Marxist scholar has passed away recently, but I haven't seen any obituary so far.

Friday, March 20, 2015

Robin Hahnel on the Fed & the pressure to raise interest rates

From The Real News Network
Translating from Fed speak, Janet Yellen is doing everything within her power to slow down the pressure that she's under to start raising interest rates here in the United States. We actually have a news network that today sort of asked the question, is Janet Yellen too socialist? And I think that's actually a good way for people to sort of understand what's going on. As much as any chairperson of the Federal Reserve Bank of the United States can be, she is actually trying the best she can to act in the interests of the general public, which is quite unusual. And so she is trying to delay as long as possible raising interest rates in the United States, mostly because she doesn't want to derail the sort of slow and tepid recovery that's going on and she understands that raising interest rates prematurely and too rapidly would have the significant danger that it would slow our recovery. And she's pointing out that there is no sign that there is inflation on the horizon, that the only reason the Fed should have to be raising interest rates really is if there is inflationary pressure and if there is a danger of inflation. And the people trying to convince the Fed to raise interest rates keeps claiming that we need to do this to prevent inflation, but they have no evidence on that side.
Originally posted here, with full transcript. Video below.

Thursday, March 19, 2015

The Economic Education of JFK: Arthur Okun's recollections

JFK with Dillon (first to JFK's right) and Heller (standing behind Dillon)

Nate has posted on JFK State of the Union address in 1963, when the tax cut was proposed to deal with the high level of unemployment of about 5.7 percent. Transcripts from an interview with Arthur Okun (of Okun's Law fame) conducted by David McComb and deposited at the LBJ Library tell the story of how that came to be.

Walter Heller was the chairman of the Council of Economic Advisers (CEA) at this time. Here is Okun on the CEA's views of the economic problem early in the JFK administration:
"The economist's diagnosis of the ills of the economy right at the start in 1961 was that it had been over-sedated with an excessively restrictive budget, which had so sapped its strength that you weren't getting the revenues from that budget; and therefore the budget looked as though it wasn't restrictive. Still you had a deficit, but the deficit was associated with trying to get too big a surplus and therefore holding down incomes and profits to the point where the revenues weren't coming in. We developed a concept called the 'full employment surplus' of trying to show where the budget would be if the economy was on a high employment growth path and trying to show that basically you had a much too tight budget, and that from the economist's point of view the right medicine was one of a more stimulative budget which would bring the economy to full employment, reduce unemployment,  strengthen investment, give us a lot more output for which there were and remain very urgent uses.  Obviously, this would mean in the short run that you'd have to do things which would make the budgetary deficit a lot bigger."
This was not the view held by Douglas Dillon, the then Secretary of Treasury, and a Republican one might add, and initially wasn't either Kennedy's view, since he had promised a balanced budget. As Okun's says: "There's no question that from the outset Dillon and Heller were giving President Kennedy quite different advice." Dillon remained a balanced budget defender. Okun tells the story of JFK's conversion to the Heller side.
"An amusing incident that I recall hearing about—President Kennedy made some statements that seemed to be wiggling off the hook of this balanced budget commitment at a press conference in August or September '61 . Dillon called him the next day and told him that we'd upset foreign bankers and urged him to clarify what he meant and reaffirm his determination. Walter, who had been delighted by the President's ability to see this more pragmatically, was told that Kennedy felt he had to do this, that he did indeed reaffirm that and that there was a balanced proposal in the fiscal '63 budget, which never materialized at all. I think the key manifestation of Kennedy's conversion to the Heller creed was the commencement address that Kennedy gave at Yale in June 1962, which was something—he really wanted to do this. And it was clear—again operating on other people's stories—he wanted a myth-exploding speech, and he ordered that it be focused on economic policy. He really went after the balanced budget myth as the key myth that needed to be destroyed."
On the substantive issue of what made JFK change his mind Okun is unclear, but Heller was central. And not just regarding the disputes within the administration. he says:
"I don't really know just how much of what kind of communication there was between Heller and President Kennedy. I know there was a flood of paper that went from the Council to the White House. Even after Kennedy was personally sold there was a further educational problem of convincing the public and convincing the Congress… Heller did a great job of public education. He got a lot of press attention to… try to popularize a notion that an underemployed economy was a great national waste. One of my first tasks on the Council was to try and estimate what our potential was. That estimate of potential output I guess remains my best known professional contribution as an economist. It's widely referred to as Okun's Law.’"
In fact, the education of the President, Congress and the public was in Okun's view the main task of the CEA at that time. In his words:
"But this was the first item on the priority list that the doctor could order for a patient. The problem was that of getting the patient to take the medicine rather than knowing what to prescribe. It was that that put all the emphasis on Educating the President, the Congress, the public, making the case publicly—you know, really improving the packaging, the labeling, the palatability of the medicine rather than improving the prescription at that time. Obviously, we did a lot of economic analysis on how big a tax cut we'd like ideally, what the appropriate unemployment target might be, what could be done to supplement general fiscal policy through manpower programs, how well guideposts could help to fend off the evil day that inflation reared its ugly head, and all that. But I think still you'd find that the largest emphasis of the Council's activity was on the salesmanship of a product rather than on the development of a superior product, because that was what the real need was."
After Kennedy's assassination Heller's task of educating LBJ wasn't as difficult. Again, according to Okun:
"I don't think he had as much trouble breaking down the balanced budget myth all over again. I think that notion of fiscal orthodoxy had been pretty well dispelled. I'm not sure it ever played as much of a part in President Johnson's ideology as it perhaps had in President Kennedy's."
Of course the task is much harder these days, since the doctors don't understand the problem and their diagnosis is often incorrect. Rather than a problem of public education, there is a problem of educating the doctors, the economics profession. The balanced budget myth and fiscal orthodoxy are back with a vengeance.

Wednesday, March 18, 2015

Lapavitsas on Greexit

Costas Lapavitsas, who is now a member of parliament for Syriza, on Greexit, which he sees as the best option.
"There are three stages. First, as I said, is the negotiated, consensual, orderly exit. 
Second stage is recovery and that would depend very much on recovery of domestic demand which is very heavily repressed in this country. There are vast resources lying unused. Small and medium enterprises would be reactivated, that’s what would really restart the Greek economy. Not exports - this worship of exports is nonsense. 
But obviously that is not really a path for sustainable growth. What Greece would need after that would be an industrial policy to restructure its productive base, to integrate itself in the world economy on a different basis. That would take a few years. 
But Greece would be still part of a common market, as a member of the EU. So it is not so easy to go back to domestic demand and to the SMEs, because it would have to kick out the big companies that could still sell cheaper.

I believe that Greece could out-compete imports very easily. Unfortunately, wages have been destroyed during the last 5 years due to bailout policies. A devaluation of 15-20% (but no more since as I said the ECB would defend the exchange rate) would give a tremendous competitive advantage. Wages would then gradually rise again."
Read the whole interview here. My guess is he is assuming that it would give competitive advantage to domestic production, and allow for growth without increasing imports too much. Costas seems to be less hopeful about the effects on exports, which would seem reasonable. I would suggest that relying on the exchange rate would not be sufficient, and that some sort of import substitution would be necessary too.

Tuesday, March 17, 2015

Ernesto Screpanti on Marx's Labor Theory of Value and The 'New Interpretation'

New Working Paper by Ernesto Screpanti. From the abstract:
Marx’s theory of labour value is flawed. This note summarizes the main reasons why this is so. At the same time, it claims that the theory of exploitation does not depend on a labour embodied valuation and can be expounded by resorting to the theory of production prices. Almost all Marxists have now accepted this truth. Most of them have been convinced by a ‘new interpretation’ which has been able to translate the price of net output into an amount of ‘living labour’ and the rate of exploitation into a ratio between unpaid and paid labour. What produced such a surprising result is the use of labour productivity as a numeraire.
Read rest here.

For more on Marx and LVT, see here.