Friday, February 12, 2016

A Clarification of the clarification of supermultipliers

After my post I got an email and post below by Franklin. Mind you, I still would refer to supermultiplier models as Kaldorian, and the models with autonomous investment as neo-Kaleckian. As Franklin notes Bortis, a Kaldorian and Sraffian, makes the transition to exogenous distribution, even if Kaldor himself didn't. Below the email and the post.

Dear Matias:

Great Post.Your use of the phrase “no independent investment function” to refer to induced investment models is unfortunately quite confusing.

This phrase since the classic survey of Hahn in Matthews has been used to refer to models in which full employment (or full capacity in Lewisian and neo-Marxian models) saving determines investment.

I am sure that what you mean is that in supermultiplier models there is no autonomous component in the (capacity creating) investment function. It would be much better to all of us if you changed that at no cost for you. If you do this , please omit this part from my uninvited guest post.

The Sraffian supermultiplier (Serrano, 1995) , as the name says is,well... Sraffian. That means that its key feature is that distribution is exogenous. In fact the original title of my 1995 PhD dissertation was going to be “demand led capacity growth under exogenous distribution”. That is why it can and recently it has been adopted/discovered by a few eminent neo-Kaleckians , as the key feature of their approach is also the exogenous profit share, determined separately from output (although along different lines through the degree of monopoly).

Kaldor himself never moved away completely from some version of the Cambridge theory of distribution, either of the “competitive” (prices are flexible relative to Money wages ) or “managerial” (there is mark-up pricing but the mark-up is function of the desired induced investment share and thus of the rate of growth of the economy (a la Wood, Eichner, etc.) . See chapter three of my PhD thesis and chapter two of my 1988 Master´s thesis for a critique of both [in Portuguese].

In both (totally unrealistic )versions of the Cambridge mechanism, it is accumulation that determines distribution endogenously, unlike the separation between distribution and accumulation we find in Sraffa , Kalecki and their modern followers.

In fact, Kaldor´s paper that I quoted in my thesis and that Lavoie (2015) mentions, called “conflict in national economic objectives” is the only one in which (although without using equations) he does not mix the harrod balance of payment equilibrium condition X/m=Ybp ,which shows a balance of payments constraint with a proper supermultiplier , say Y=G+X/(c(1-t)+m-gv ) which is the level of output determined by effective demand

In all his other works Kaldor makes Y=Ybp and this occurs because Kaldor arbitrarily assumes that G=t.Y and that vg =(1- c(1-t)) via some Cambridge mechanism that makes the aggregate marginal propensity to consume adjust itself to the marginal propensity to invest vg. See Fabio Freitas (2003) and Bhering & Serrano (2013) for details here and here.

(Palumbo ROPE 2009 also mentions these assumptions by Kaldor but unfortunately fails to note that the endogeneity of distribution that is the problem and not the induced investment function as she claims)

The inconsistency of having a proper aggregate demand led growth model with endogenous Cambridge distribution is the reason why I say in chapter two of my Ph. D. thesis that “It seems then that the only reason why Kaldor did not get to point of producing a explicit model of the industrial economy identical to our Sraffian supermultiplier must be attributed to

His reluctance to abandon completely his own version of the Cambridge theory of distribution. In fact , a consistent supermultiplier analysis requires the distribution of income  (and the aggregate marginal propensity to save) to be treated as an exogenous parameter, being therefore incompatible with the idea that distribution is somehow endogenously determined via the Cambridge equation.”

And it is then also no surprise that it was Heinrich Bortis, supervised by Kaldor that first got to the idea of an exogenous distribution supermultiplier, that he calls “Classical-Keynesian” in his 1979 Cambridge PhD (though his book was published only in 1997).

But note that , again as I demonstrated in chapter 3 of thesis, that in Cambridge models whatever the initial level of capacity there will always be enough aggregate demand for as distribution will change so that aggregate consumption changes to fill the gap (see Serrano & Freitas, 2015).

Of course you may ask: but then what is the point of having induced investment growing at the rate the autonomous part of demand grows if there is never lack of aggregate demand? The only consistent answer to this last question is: please just drop the endogenous distribution Kaldorian supermultiplier and use either the neo-Kaleckian or Sraffian ones, according to the theory of exogenous distribution you find more reasonable. In other words, if you like the idea of an autonomous demand supermultiplier , don´t be Kaldorian (in this specific sense). The exogenous distribution supermultipliers are not just more general as Vernengo correctly argues but most importantly , they are more consistent.

Wednesday, February 10, 2016

Kaldorian and Sraffian supermultipliers: a clarification

This is a post for those interested in demand-led theories of growth. Not long ago I wrote a post on misconceptions about Sraffian economics. Marc Lavoie sent me a nice email about it, and a recent paper he published in Metroeconomica (subscription required), which comments on a paper I wrote with Esteban Pérez (working paper available here). In his discussion of supermultiplier models, which put the multiplier and the accelerator together to explain -- not fluctuations of the level of output around its normal position -- but the determination of trend or normal output. Lavoie says:
"Other post-Keynesians, also assume that non-capacity creating autonomous expenditures are the driving force, rather than investment. Serrano himself refers to Kaldor (1983, p. 9) to provide support for this reversal of causality. Fazzari et al. (2013) assume that there is some unidentified demand component that grows autonomously, in order to tame Harrodian instability; Godley and Lavoie (2007, ch. 11) and, as already pointed out Allain (2015), rely on autonomous government expenditures. Indeed, there is a large Kaldorian literature that relies on exogenous growth components other than business investment, most particularly the whole literature on Thirlwall 's law with its exogenous exports (McCombie and Thirlwall, 1994), as well as Godley and Cripps (1983), with both government expenditure and export sales."
And in a footonte to that passage he says:
"Thus, adding to the confusion over terminology, Pérez-Caldentey and Vernengo (2013) refer to the Kaldorian tradition when discussing models based on induced investment and non-capacity creating exogenous growth components such as Serrano's Sraffian supermultiplier analysis."
So let me clarify our use of Kaldorian, and also why I believe that it is a mistake to refer to the Sraffian supermultiplier as neo-Kaleckian, even though it does have evidently Kaleckian elements. As I understand the distinction that came to dominate demand-led models of growth, there are basically two* main traditions, one that is referred to as neo-Kaleckian, and one that is referred to as Kaldorian.

The first tradition developed from Bob Rowthorn's expansion of Joan Robinson's 1960s model. And because Joan Robinson was influenced by Kalecki, and  Rowthorn, a Marxist author, was seen as Kaleckian, the name stuck. The original model, one must note was wage-led. And causality basically determined whether the authors was Keynesian or Marxist, with Ed Nell famously referring to one author that suggested that causality went from income distribution to growth as Jean Baptiste Marglin. At any rate, Marxist and Keynesian closures, to use the term popularized in this context by Lance Taylor, were special cases of the neo-Kaleckian model. Later developments introduced changes in the independent investment function which allowed for a profit-led closure.

As I noted before, the term Kaleckian is a bit of a misnomer. The current version of the model allows for a profit-led closure, which is not clearly in Kalecki, and, besides its derived from Joan Robinson's model. The Kaleckian feature is that often it is assumed that workers do not save, and capitalists do not consume, for simplification, a classical political economy type of assumption really.**

The genesis of supermultiplier models is more convoluted. On the one hand, the combination of multiplier and accelerator was used to discuss economic cycles, not growth, including by Hicks, who first discussed the idea of the supermultiplier. By the late 1960s, Kaldor moved away from the differential savings or neo-Keynesian growth models (sometimes referred to as Kaldor-Pasinetti or Cambridge growth model), and adopted the supermultiplier model, formalized by Thirlwall in the 1970s. The model assumed as a simplification that exports were the only autonomous component of demand. In accordance with the accelerator, investment was seen as derived demand. That is the main difference with the so-called Neo-Kaleckian models, namely: there is no independent investment function.***

The idea of the supermultiplier was later, in the 1980s and 1990s, developed by Bortis and Serrano,**** both authors sharing a Sraffian perspective. In these versions, autonomous spending was not restricted to exports, and government spending was also relevant. The term Sraffian or classical-Keynesian has been used to describe these models. In essence, they are Kaldorian models, since investment is derived demand, as much as in Thirlwall's model. In this sense, even though the Kaldorian models a la Thirlwall are a special case of the Sraffian supermultiplier, as discussed here in my debate with Jaime Ros (in Spanish), and by definition more general than the export-led growth model, they came later, and can be seen as a development within this tradition.

So certainly the intention is not to create confusion. In my view, models with an independent investment function are broadly speaking neo-Kaleckian, while models in which investment is derived demand are Kaldorian. And there are differences between models within those broadly defined traditions.

* All taxonomies are somewhat arbitrary and one might see some sub-divisions from the two main branches discussed here as standing in the same footing, for example, some might argue for an explicitly Marxist tradition.

** Goodwin predator-prey models, which have become quite fashionable, can be seen as a variation of these neo-Kaleckian models.

*** I think these Cambridge models have been completely abandoned since the 1960s, and that is the reason why I don't have three types of models in my taxonomy. They are a historical curiosity, associated to a response to the Harrod instability problem, at a time when full employment seemed like a stylized fact in advanced capitalist economies. For a clear explanation of the implications of the different model closures see the paper by Franklin Serrano and Fabio Freitas here.

**** The Sraffian versions of the supermultiplier model also assume differential savings by workers and capitalists, as many other classical political economy inspired models, and in that sense have Kaleckain features. But they are not neo-Kaleckian, since there is no independent investment function.

Tuesday, February 9, 2016

Global depreciation since the collapse of oil prices

One figure is worth a thousand words (negative number imply depreciation).
So, if you think China devalued a lot...

Source here.

PS: On Twitter some have argued that some depreciations are overestimated. My point remains. China did not depreciate much, comparatively. And besides as noted before there might be a connection between depreciation in the periphery and lower commodity prices.

Sunday, February 7, 2016

On the blogs

Friedman responds to Thorpe on Single-Payer -- Gerald Friedman on the true costs of Medicare for all

Is the global economy headed for another crash? -- Ann Pettifor and others debate the issue. She thinks the crisis is "quite imminent." Mind you, I do agree that not enough was done to re-regualte Wall Street, not even close. But I don't see a global financial crisis as imminent

Hillary Is the Candidate of the War Machine -- Jeff Sachs on Hillary. And no, it's not about Wall Street

Friday, February 5, 2016

Unemployment is below 5%, and no inflation to be seen

Numbers are out,employment rose by 151,000 in last month, and December numbers were revised down too.Manufacturing added 29,000 jobs in January. The unemployment rate fell to 4.9 percent. Also, average hourly earnings increased by 12 cents last month, and at about 2.5 percent for the last year. So the unemployment rate has crossed the 5 percent barrier, but inflation does not seem to pick up. The natural rate keeps moving, and mainstream macro has very little to say about it.

Thursday, February 4, 2016

Follow the Money

That's what Deep Throat said to Bob Woodward in All the President's Men. Good advice. I'm certainly not a specialist on campaign contributions, but Hillary Clinton said regarding Wall Street that "They’re not giving me very much money now, I can tell you that much" after the exchange with Anderson Cooper (video available here), and I decided to check it out. This website provides some comparative data on Hillary and Bernie's donors [I'm assuming the data is accurate and the info I provide is based on that assumption].

Hilary gets 80% of her funds from large donors, compared to 26% from Large Individual contributors for Bernie. At the top of her list the Soros Fund, with more than 7 million, while for Bernie it's Alphabet Inc., with less than 100,000. Not sure how she claimed to receive 90% from small donors.

If we take "Wall Street" to mean the sum of Securities & Investment, Real Estate and Misc. Finance, then she received about 21.5 million from them in this electoral cycle, or about 16% of the funds raised. Number one industry for Bernie is "Retired" (if that can be called an industry) and second is Education, with 1 and half a million respectively. Real Estate and Misc. Finance contribute slightly more than 200,000 of his funds.

 Hilary does receive 50% of her contributions from women, while for Bernie it's about 36%.

You decide who, if anybody, is the Wall Street candidate.

PS: For comparison Jeb Bush gets 93% from big donors, and about 38% from "Wall Street," defined as above. If you add Insurance, then he gets about 46% from "Wall Street." Ted Cruz is also at around 45% of his contributions.

Tuesday, February 2, 2016

Lauchlin Currie's review of Keynes' General Theory

Curried Keynesianism in action
The review with an intro can be read here (or here). Currie is often considered the first Keynesian in the Roosevelt administration (I suggested here that, while not a professional economist, that merit goes to Eccles), and was also the first to work in the White House, before the Employment Act and the creation of the Council of Economic Advisers (CEA). He was also later unjustly attacked as a Soviet spy, and Roger Sandilands has dealt with this here (subscription required). His biography of Currie is a must read.

Monday, February 1, 2016

Simon Wren-Lewis on New Classical Economics and the Financial Crisis

New paper by Wren-Lewis titled "Unravelling the New Classical Counter Revolution." It provides a strong New Keynesian critique of the New Classical/Real Business Cycle schools. He argues, correctly in my view, that the problem is the abandoning of the Keynesian method of analysis. I'm less keen on microfoundations. Or at least on marginalist microfoundations. But it is important to understand how much the fundamentalist views of Lucas and Prescott have affected the profession.

From the abstract:
To understand the position of Keynes's The General Theory today, and why so many policy-makers felt they had to go back to it to understand the Great Recession, we need to understand the New Classical Counter Revolution (NCCR), and why it was so successful. This revolution can be seen as having two strands. The first, which attempted to replace Keynesian policy, failed. The second, which was to change the way academic macroeconomics was done, was successful. Before the NCCR, macroeconomics was an intensely empirical discipline: something made possible by the developments in statistics and econometrics inspired by The General Theory. After the NCCR and its emphasis on microfoundations, it became much more deductive. 
As a result, most academic macroeconomists today would see the foundation of their discipline as not coming from The General Theory, but as coming from basic microeconomic theory – arguably the ‘classical theory’ that Keynes was so keen to cast aside. Students are also taught that pre-NCCR methods of analysing the economy are fatally flawed, and that simulating DSGE models is the only proper way of doing policy analysis. This is simply wrong. The problem with the NCCR was not the emergence of microfoundations modelling, which is a progressive research programme, but that it discouraged the methods of analysis that had flourished after The General Theory. I argue that, had there been more academic interest in these alternative forms of analysis, the discipline would have been better prepared ahead of the financial crisis.
Read the whole paper here

The relevance of Keynes's General Theory after 80 years

By Thomas Palley, Louis-Philippe Rochon and Matías Vernengo*

This year marks two important anniversaries in macroeconomics: the 80th anniversary of the publication of Keynes's The General Theory of Employment, Interest and Money (1936), and the 70th anniversary of Keynes's premature death, at the age of 63. To mark these anniversaries, the first issue of the fourth year of the Review of Keynesian Economics is dedicated to Keynes.

The issue contains a symposium of papers titled ‘The Relevance of Keynes's General Theory after 80 Years’ and some previously unpublished archive material on Keynes. The unpublished material consists of notes from a 1936 University of California course taught by Frank Knight in which The General Theory was discussed, and a memorandum written by Lauchlin Currie, who is considered the first and most combative Keynesian in the Roosevelt administration during the early phases of the New Deal.

The 80th anniversary of The General Theory takes place at a time when the global economy is struggling with economic stagnation that set in after the financial crisis of 2008. In some respects, these conditions have parallels with the 1930s when the Great Depression followed the financial crisis of 1929. This time, however, economic depression was avoided by timely economic policy interventions that either bore the direct hallmarks of conventional Keynesian thinking or were inspired by Keynesian thinking about the economy's limited self-stabilizing capacity.

Read full text here.

Thomas Palley - Senior Economic Policy Adviser, AFL-CIO, Washington, DC, USA
Louis-Philippe Rochon - Associate Professor, Laurentian University, Greater Sudbury, ON, Canada
Matías Vernengo - Professor, Bucknell University, Lewisburg, PA, USA

Sunday, January 31, 2016

On the blogs

Kalecki And Keynes On Wages -- by V. Ramanan. Keynes' reply to Dunlop and Tarshis on the pro-cyclicality of real wages is available here. This is an issue I still discuss in my macro classes, that is not part of any manual I know

How Central Banks (and even Keynes) Misled the Public About Banking and Money -- Perry Mehrling on the Bank of England's admission that money is endogenous. In all fairness endogenous money is quite old and no central bank ever pretended they controlled money supply other than in the 1970s, when they tried and failed. So it's monetary economists (and Keynes in the GT, but not in the Treatise for that matter, where he used a Wicksellian approach)

Two Views On Introductory Economics -- Robert Vienneau on Noah Smith and Robert Paul Wolff's views, which basically are the marginalist supply and demand versus the surplus approach

Introduction to Economic History -- Brad DeLong posted the link to his graduate history course with Barry Eichengreen. I used to teach a graduate course in economic history too

Did socialism keep capitalism equal? -- Older post by Branko Milanovic that I missed somehow, and he twitted about recently