A Keynesian case for industrial policy

DSC00234Keynesian economics emphasises the primacy of aggregate demand or expenditure in driving the growth of output and employment. More mainstream neoclassical Keynesians, and the New Keynesians, tend to argue that inadequate demand is a short run phenomenon. The more radical post-Keynesians argue that it can be a problem in the long run too.

To varying degrees, these economists make the case for demand management via some combination of monetary, fiscal and exchange rate policy. The more radically minded have also long argued for incomes policies to manage wage and price inflation, and reform to the international monetary system in order to allow national governments the space to manage demand and promote full employment while preventing excessive and destabilising current account imbalances.

While Keynesian economics focuses on demand and, traditionally, macroeconomics, industrial policy aims to impact more on the supply-side of the economy and draws on microeconomics. Continue reading


Understanding the ‘Three Balances’

This 14 minute animated video is a nice introduction to the Three Sectoral Financial Balances, which are an important part of macroeconomics, or the study of the economy as a whole. The dialogue sounds a little odd, but stick with it.

The video helps to dispel some myths about the desirability or otherwise of government budget deficits and surpluses, and how the associated money flows interact with the rest of the economy: the private sector (firms and households) and the foreign sector (the rest of the world).

In particular, the discussion outlines how the US government ran budget surpluses in the late 1990s, but also how this was more than offset by the private sector deficit, and the resultant accumulation of private debt, which ultimately proved unsustainable.

The post-Keynesian economist Wynne Godley, originator of the Three Balances approach, warned about this in 1999 here, and forecast a recession, accompanied by rising unemployment and government deficits, as these trends necessarily began to unwind over the medium term.

In brief: the economics of Hyman Minsky

MinskyAs the 2008 financial crisis broke, the term ‘Minsky moment’ became widely used by commentators and financiers (it was originally coined in 1998), as the work of this relatively obscure economist came into fashion. Since then, his major works have been reprinted, and his ideas widely cited, especially among those critical of the financialization of recent decades.

Once again, from Michael Hudson‘s heterodox ‘dictionary’ of economics J is for Junk Economics (p.154-5): 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

Some macroeconomic paradoxes: part 2

As a follow-up to my last post, here are four more paradoxes that can occur in a truly macroeconomic analysis. As before, what may be true for individual economic agents when acting alone or in small numbers can lead to the opposite outcome when this is applied to the economy as a whole. Once again, the ideas are taken from Marc Lavoie’s textbook Post-Keynesian Economics: New Foundations (2014), Ch.1, p.18-22.

  • The paradox of debt. For firms and financial institutions, attempts to reduce leverage ratios (borrowing) may lead to them cutting back on investment. If all companies do this, it will cause a slowdown in growth, reducing overall profitability. This will make it harder to reduce leverage and may even lead to ratios rising if the slowdown is large enough. This could also apply to governments if public sector austerity reduces the growth rate. For the financial sector, reducing leverage could lead to large-scale sales of assets, driving down their price and creating losses; this will reduce the institutions’ own funds, and could lead to a rise in leverage ratios.

Continue reading

Some macroeconomic paradoxes: part 1

DSC00228Mainstream macroeconomics (the study of the economy as a whole) places great importance on ‘microfoundations’. The microfoundations of macroeconomics start from the behaviour of isolated individuals, or more accurately a single representative individual, and generalise his or her behaviour in order to derive macroeconomic outcomes.

More heterodox (non-mainstream) schools of thought hold that holism should not be so neglected. More holistic theories suggest that emergence is a characteristic of social structures and forces: the whole cannot necessarily be reduced to the sum of its parts and there is therefore a place for starting analysis at the macroeconomic level. Continue reading

Inequality and economic growth: a brief note

What is the relationship between inequality and economic performance? Inequality within many countries has risen over the last 30 years, while that between them has fallen as poorer nations such as China have been ‘catching up’ with richer ones.

Many non-mainstream or heterodox economists, as well as some more mainstream but left-liberal figures such as Joseph Stiglitz, have argued that rising inequality and wage stagnation among middle and lower income groups was part of the cause of the excessive accumulation of private debt which led to the financial crisis.

A 2014 study by the OECD has shown that reducing inequality could significantly boost growth. Continue reading