Keynes on global trade, conflict and full employment

keynesThe passage below is taken from the concluding pages of John Maynard Keynes’ famous General Theory, where he speculates on the benefits to international relations from avoiding conflict over international trade. If full employment can be achieved domestically through judicious government policies this would, he hoped, lessen the need for countries to come into conflict with each other over the balance of payments of trade, investment and capital flows.

Given the historical record, I am actually skeptical about the possibilities for achieving and sustaining full employment, however that might be defined. I am therefore not a perennially optimistic Keynesian. Sooner or later, growing economic imbalances will give rise to crisis and recession, and rising unemployment. However, I do think the world economy could be more wisely managed than it is now, with the US the (still?) reluctant hegemon and a rising China among other potentially destabilising trends. Continue reading

Richard Koo explains balance sheet recessions

Economist Richard Koo is well known for his concept of  a ‘balance sheet recession’. In this short video he explains how the recent Great Recession, the Great Depression of the 1930s, and Japan’s economic stagnation since the 1990s are all examples of this, and what can be done about it.

A number of somewhat iconoclastic economists have explored the nature and consequences of asset-price bubbles, fueled by the accumulation of private sector debt, and their subsequent collapse, followed by private sector deleveraging (paying down debt). They include Koo, Michael Pettis, Steve Keen and Michael Hudson, the latter three being influenced by the late Hyman Minsky and his Financial Instability Hypothesis. The four of them proffer somewhat different solutions to the long stagnation that can follow the collapse of a debt-fueled asset-price bubble, which we are arguably still living through.

Koo favours a fiscal stimulus in which government spending exceeds revenue at a rate sufficient to prevent the economy collapsing as a large number of firms use their cash flow to pay down debt, rather than invest. This is what has been done intermittently in Japan. Koo argues that without the stimulus the Japanese economy would have experienced its own Great Depression, rather than simply years of stagnation.

Keen and Hudson favour a Modern Debt Jubilee in which much private debt is simply forgiven and wiped out, allowing households and firms to raise their spending on consumption and investment and drive economic recovery.

Pettis focuses his analysis on the current account imbalances across the global economy which in his view caused the build-up of debt. The unwinding of these imbalances is required to secure a more sustainable global recovery.

There is something to be said for the ideas of all of the above. I am keen to compare them and integrate the most important aspects, as their thinking overlaps to a significant extent. That will be the subject of a future post! In the meantime, I can definitely recommend watching the video as an introduction to Koo’s thinking.

How austerity may reduce innovation

An interesting post from Simon Wren-Lewis on how sustained austerity can lower innovation and productivity growth. With the latter growing painfully slowly in the UK and other rich countries for a number of years, this is potentially important. As he notes, it may only explain part of the productivity slowdown, but it still highlights one of the negative impacts of austerity.

Put briefly, austerity weakens aggregate demand when it cannot be offset by monetary policy (as has been the case since the recession). This may create an ‘innovations gap’. Firms facing reduced demand for their products will slow down the rate at which they create or utilize new products, processes and technology via new investment, leading to weaker growth in productivity. This sort of investment would have ’embodied’ the new technology, but in its absence, the improvements will not take place.

Anwar Shaikh’s Classical theory of wages and unemployment

9780199390632Anwar Shaikh is a Professor of economics at the New School for Social Research in New York. His ideas, in his own words, draw mainly but not exclusively on the ‘Classical tradition’ of Smith, Ricardo and Marx. Marx himself was a critic of classical political economy, so in some ways Marxist political economy could be considered as a separate school of thought.

In Shaikh’s 2016 magnum opus, Capitalism, he also draws on Keynes and Kalecki, two economists who greatly inspired the post-Keynesian school. For Shaikh, the Keynesian/Kaleckian emphasis on aggregate demand remains important, but so too does aggregate supply, which is emphasised in mainstream neo-classical economics. According to Shaikh, the classical tradition is not so much demand-side, or supply-side, but ‘profit-side’. The rate of profit is central to his work, and it affects both demand and supply in the capitalist economy.

In this post I want to outline Shaikh’s theory of wages and unemployment, which is covered in Chapter 14 of Capitalism. He covers a great deal of theoretical and empirical ground in the book, not least in this chapter, and it makes for stimulating reading. To avoid making this post too long, I will focus on Shaikh’s own particular theory, rather than spending much time comparing it to alternative theories, which Shaikh does in the book. Continue reading

Can we avoid another financial crisis? Steve Keen’s latest book

Professor Steve Keen is an economist working in the post-Keynesian tradition at Kingston University here in the UK. He is well-known as a critic of mainstream economics (see his excellent and wide-ranging book Debunking Economics) and its failure to predict or satisfactorily explain the Great Financial Crisis (GFC) and recession, which he did some years before it occurred. His latest book is Can we avoid another financial crisis?a 130-page polemic aimed at the intelligent layman.

Keen’s central thesis is that mainstream economics failed because it ignores the role of private debt creation by the financial system, known in the jargon as ‘endogenous money’. This grew unsustainably in many countries in the decades prior to the crisis and drove a boom in the real economy and, even moreso, in asset prices (stock markets and housing). Credit expansion in economies such as the US and UK started growing consistently more rapidly than GDP in the 1980s, following the deregulation of the financial sector. Although it was subject to cycles, the trend in private debt as a share of GDP was upward. When its growth slowed or even went into reverse, the result was a severe recession and the aftermath is still with us both economically and politically. Continue reading