ABSTRACT
Marc Lavoie’s very long (74-page), very stimulating and sometimes very provocative first chapter has the title ‘Essentials of heterodox and post-Keynesian economics’. It deals with an extremely broad range of issues in economic methodology and in the sociology (broadly defined) of different schools of thought in economics, in addition to providing a substantial discussion of theoretical and policy questions. Space constraints prevent me from dealing with many of these very interesting and occasionally contentious propositions. Instead I shall confine my contribution to an assessment of Marc’s position on the heterodox and orthodox schools of thought (sections 1.2 and 1.3, pp. 4–16); on the related question of ‘atomism versus holism’ (section 1.3.3, pp. 17–24); on the different post-Keynesian strands, with particular reference to his treatment of Hyman Minsky, Piero Sraffa and Michał Kalecki (section 1.4.3, pp. 40–46); and on the important question of whether we should adopt a ‘narrow tent’ or ‘broad tent’ definition of post-Keynesianism (section 1.4.4, pp. 46–49).
KEYWORDS:
Introduction
Marc Lavoie’s very long (74-page), very stimulating and sometimes very provocative first chapter has the title ‘Essentials of heterodox and post-Keynesian economics’. It deals with an extremely broad range of issues in economic methodology and in the sociology (broadly defined) of different schools of thought in economics, in addition to providing a substantial discussion of theoretical and policy questions. I cannot, in a 5,000-word comment, deal with many of these very interesting and occasionally contentious propositions. Instead I shall confine my contribution to an assessment of Marc’s position on the heterodox and orthodox schools of thought (sections 1.2 and 1.3, pp. 4–16); on the related question of ‘atomism versus holism’ (section 1.3.3, pp. 17–24); on the different post-Keynesian strands, with particular reference to his treatment of Hyman Minsky, Piero Sraffa and Michał Kalecki (section 1.4.3, pp. 40–46); and on the important question of whether we should adopt a ‘narrow tent’ or ‘broad tent’ definition of post-Keynesianism (section 1.4.4, pp. 46–49).
Heterodox versus Orthodox Economics
As Marc notes at the outset in Table 1.1 (p. 5), at least five alternative names have been provided to specify the contrasts between heterodox and orthodox economics. He chooses not to use any of these names and instead insists that ‘an economist who is not part of the heterodox group must belong to the orthodoxy’, and he sees ‘nothing wrong in assimilating orthodox economics to the neoclassical paradigm’ (p. 5). He further explains that he avoids the use of the term ‘political economy’ wherever possible, as this has too often been used, rather confusingly, by advocates of neoclassical theory (p. 6).
These linguistic questions are of course much less important than the substantive issues posed by the need to identify and distinguish the various heterodox schools of thought, which Marc deals with in section 1.2.2. Table 1.2, which occupies almost all of p. 7, includes no fewer than 21 heterodox schools, 16 of which have their own professional associations. He notes that the financial crisis that began in 2008 has given a boost to ‘all brands of heterodox economics’, in particular to Marxism and the French regulation school, which both share significant theoretical similarities with the post-Keynesians. He is also careful to distinguish ‘old’ and ‘new’ institutional and behavioural economics, since the new variants of these two schools have much in common with the orthodoxy (p. 9).
In section 1.2.3 (pp. 9–11) Marc has some very interesting points to make about the distinction between orthodox dissenters and heterodox economists. He lists no fewer than 14 orthodox dissenters, many of them Nobel laureates. Some of them, he reminds us, ‘have explicitly stated that they certainly did not want to rock the mainstream boat’, while others, like Herbert Simon and William Vickrey, ‘have turned towards heterodox economics’ (pp. 10–11). Post-Keynesians will also be familiar with two more of Marc’s dissenters, Paul Krugman and Joseph Stiglitz, with Krugman being especially familiar to Australian readers since his New York Times articles are often reprinted in the Age and the Sydney Morning Herald.
Section 1.3 (pp. 11–16) is devoted to the presuppositions of the heterodox and orthodox paradigms. Marc cites approvingly the view of Axel Leijonhufvud that a research tradition is defined essentially by a set of commonly held metaphysical beliefs relating to the nature and structure of reality. ‘What is argued here is that there are two research traditions in economics, each with its own presuppositions, and that one cannot be called more scientific than the other, even though the orthodox research programme is much more in awe of formalization’ (p. 11).
In Table 1.3 (p. 12) Marc summarises the contrasting presuppositions of the heterodox and orthodox schools, which relate to epistemology and ontology (realism versus instrumentalism); rationality (satisficing versus optimisation); method (holism and organicism versus atomism); the economic core (production, growth and abundance versus scarcity); and the political core (regulated markets versus unfettered markets). He elaborates on the important question of realism versus instrumentalism in the very substantial section 1.3.1 (pp. 12–16), where he outlines the important work of Tony Lawson on the distinction between realism and realisticness (pp. 12–13) and takes Milton Friedman as the best-known neoclassical advocate of instrumentalism (pp. 13–16). While conceding that ‘there is a good deal of realisticness in many mainstream models, in particular in the models put forth by New Keynesian authors’, he argues strongly that the principal assumptions of all mainstream theory ‘defy common sense, based as they are on an all-knowing agent attempting to maximize some utility function by increasing work when she expects future taxes to rise and by increasing leisure time and reducing working hours when her real wage decreases’. He then quotes Nicholas Kaldor, who maintained, as early as 1966, that it was not possible to salvage mainstream economics: ‘in an attempt to relieve the programme of its unrealistic foundations, the whole edifice would crumble’ (p. 15).
I have nothing to disagree with in any of Marc’s arguments on these issues, which I find entirely convincing. But I would have added some discussion of the relationships between heterodox economists and the other social sciences, which as we shall see below are highly relevant to the specific case of post-Keynesian economics. However, these early sections of chapter 1 do offer a very good introduction to the chapter, and indeed to the book as a whole.
Atomism versus Holism
Marc has some very sensible and very interesting things to say about the contrast between methodological individualism (or atomism) and holism (or organicism). He begins by summarising the mainstream position, which is based on the conception of ‘an economy based on isolated atoms’, or ‘non-interacting “monads”’, and thus requires that ‘all analysis must start at the level of the isolated optimising individual’. As he notes, the position on these questions of the great majority of heterodox economists is very different, emphasising the importance of interpersonal influences, which include the search for status and the role of herd behaviour. Post-Keynesian and other heterodox thinkers stress ‘the predisposition to replicate the behaviour of others or to catch up with others’ and ‘the search for status and positional goods’ (p. 17). They argue that such herd or group behaviour is especially important in financial markets. At all events, social classes must be taken into account, not just isolated individuals, and various forms of institutional behaviour are also fundamentally important.
All this matters because it explains the nature of the emergent properties that give rise to a number of macroeconomic paradoxes, also known as fallacies of composition, which are detailed in Table 1.4. The first of these, the Keynesian paradox of thrift, was very clearly seen during the global financial crisis of 2007–9. As Marc notes, the crisis revealed a lack of awareness of the paradox, with many mainstream theorists arguing (with Hayek) that increased purchases of consumer goods would increase unemployment. ‘Luckily’, he notes, ‘some decision-makers understood the paradox of thrift’ (p. 19), among them the Governor of the Bank of England, Mark Carney, and implemented sensible macroeconomic policies.
If the paradox of thrift can be attributed directly to Keynes, the next two paradoxes were set out very clearly by Kalecki. The paradox of public deficits denies the crowding-out effect that many mainstream economists continue to endorse, arguing instead that higher public deficits will increase corporate profits and stimulate output and employment. Again, fortunately, this was recognised by several major governments during the financial crisis. The paradox of costs was set out by Kalecki as early as 1939: ‘a decrease in real wages will not raise the profits of firms and will instead lead to a fall in the rate of employment’. As Marc notes, ‘this of course is nothing else than a variant of Marx’s problem of the realization of surplus value’ (p. 19), confirming the affinities between Marxian political economy and the Kaleckian variant of Post Keynesian economic theory.
Marc identifies four further paradoxes, one relating to profit-led demand in an open economy and three to wage flexibility and labour market flexibility more generally (pp. 19–20). He then discusses six paradoxes tied directly to the financial system, which he summarises in Table 1. 5 (p. 20). The first of these is the paradox of debt, first set out by Irving Fisher and elaborated on by the Austrian post-Keynesian, Josef Steindl. While it is always possible for any one individual agent to reduce their debt, it may well be impossible for the system as a whole. If all companies reduce their investment expenditure, the rate of growth of output will fall, or even become negative, and ‘the actual leverage ratio may rise, moving in a direction that is the opposite of what is intended by the entrepreneurs’ (p. 21).
No less important is the paradox of tranquillity. This, Marc tells us, is an expression that he himself had coined in 1986 when studying the work of Hyman Minsky. ‘According to Minsky, a stable growing economy is a contradiction in terms’. In a real-world capitalist economy, ‘a string of successful years diminishes perceived risk and uncertainty’, so that memories of previous crises fade and economic agents begin to take on more and more risk. ‘The longer an economy is in a tranquil state of growth, the less likely it is to remain in such a state’ (p. 21). Thus stability is itself destabilising. For Marc this is an inherent characteristic of an unregulated capitalist economy, and it is strengthened by the system’s constant introduction of financial innovations. I shall have more to say about this important question later in the chapter.
There are two variants of the paradox of liquidity, one set out by Sheila Dow and the other (again) by Minsky. First there is ‘the obvious fact also linked to Fisher’s debt-deflation proposition, that the attempt of economic agents to become more liquid transforms previously liquid assets into not-so-liquid assets’. This is stressed by Dow. ‘But there is a second paradox of liquidity tied to innovation in the financial system’. As Minsky pointed out, such innovations ‘seem to increase liquidity when they are really diminishing it’ (p. 22).
Marc concludes this section of the chapter with a brief discussion of two additional financial paradoxes: the paradox of risk, which has important implications for the role of fundamental uncertainty in any post-Keynesian analysis of real-world capitalism, and the paradox of degrading standards, which was set out by the Minskyan financier Paul McCully and applied in particular to mortgage finance. It explains ‘how it is possible for banks and other financial institutions to keep providing loans to ever less qualified borrowers while everything seems to run smoothly’ (p. 22). While real estate prices continue to grow, borrowers do not default. Thus the validation of previous lending decisions encourages the issuance of ever-richer loans, but these loans in turn contribute to rising housing prices, until the market runs out of qualified buyers’ (p. 23) and default rates begin to rise.
All this is very well done, and I have no significant criticisms of Marc’s analysis, but I would just suggest one brief addition. Marc makes no mention of the ‘microfoundations’ metaphor, on which I have written at some (possibly excessive) length (King Citation2013). It is of course a thoroughly misleading metaphor, since the foundations of buildings are not altered by the walls, floors and roofs that are erected upon them (there is no downward causation), and nothing in the nature of emergent properties can be found in the construction industry, where fallacies of composition/paradoxes are non-existent. In the economy, however, significant changes in macroeconomic conditions often do have substantial effects on the operation of firms and industries (so that there is downward causation), and emergent properties are often observed, with several well-known paradoxes (of thrift, wages and liquidity) making it impossible to infer accurate knowledge of the macro economy from a complete understanding of the individuals who constitute it (so that there are emergent properties). But the microfoundations metaphor is still widely used by post-Keynesians and other heterodox writers. It causes quite unnecessary confusion, and it really should be abandoned.
The Different Post-Keynesian Strands
Marc’s substantial analysis of the different strands of post-Keynesian thinking is, almost inevitably, more contentious. In Table 1.8 (p. 41) he distinguishes five strands of thought: the fundamentalist Keynesians, the Sraffians, the Kaleckians, the institutionalists and the Kaldorians. But he also cites the opinions of Hamouda and Harcourt (Citation1988), who recognise only three strands: the American fundamentalists, the Kaleckians and the Sraffians. As he concedes, the inclusion of the (mainly Italian) Sraffians is controversial, since they are ‘very much concerned with the determination of relative prices, the choices of techniques, joint production and the interdependence inherent to the existence of a multisectoral production system, as in input–output analysis’. However, ‘questions related to output and employment, capacity and capacity utilization, or to money and interest rates were out of the [Sraffian] core, although this did not mean that they were unimportant or not worthy of study’ (p. 42)
This, it is often argued, is very different from the core of post-Keynesian thought, on almost any definition of the latter. Many theorists have rejected the inclusion of the Sraffians as a strand of post-Keynesian thinking. Their insistence on the analysis of long period positions, it is maintained, is very difficult to reconcile with the Kaleckian view of the long run as nothing more than a series of short runs. The Sraffians regard the study of ergodic systems by means of closed system theorising as critically important, have nothing to say about path dependence, and overplay the importance of rigour at the expense of relevance. ‘There is no role in Sraffian models for fundamental uncertainty, money or the principle of effective demand; there are no agents, no entrepreneurs, no profit expectations, no financial constraints or financial instability’ (King Citation2015, pp. 116–117).
While Marc does cite some of those who are opposed to the inclusion of the Sraffians, he justifies it on the grounds of tradition and history rather than theoretical focus. There is also, he maintains, underlying agreement on important policy questions, including the existence of involuntary unemployment, the key role of output and employment variations in macroeconomic adjustments, and the argument that economic policy is effective and will stabilise the economy (p. 42). And Mike Howard reminds me that the core of Sraffian theory is extremely broad and general, so that it is in principle reconcilable with a wide range of approached to macroeconomics. While all this is true, I suspect that the controversy over the inclusion of the Sraffians in post-Keynesianism will continue, not least because (as Louis-Philippe Rochon has reminded me) many of the younger scholars influenced by Sraffa do indeed take a more eclectic position on macroeconomic issues.
The two remaining strands that Marc identifies are the institutionalists and the Kaldorians, the latter being ‘mostly concerned with the constraints arising from open economy considerations, such as the balance of payments constraints or the fundamental identity that links private financial saving, public deficit and the current account balance. In the 1970s this strand became known as the New Cambridge School’ (p. 43).
All this is neatly summarised in the huge Table 1.9, which occupies almost all of p. 46, and lists the five post-Keynesians strands along with their main themes and principal authors. Marc’s treatment of these issues is very interesting, very clearly presented and highly informative. But I have form in this area (King Citation2015, chs. 2, 9, 10), and I would have done it all rather differently. Like Hamouda and Harcourt I recognise only three strands of post-Keynesian thought: the fundamentalist Keynesians, the Kaleckians and the Minskyans. I believe there to be a strong case for not treating Hyman Minsky as a fundamentalist Keynesian, since he did not believe, as they do, that ‘it is all in the General Theory’, so long as the great text is correctly interpreted (King Citation2015, p. 13–15). Minsky was principally concerned with the relationship between the investment banker and his capitalist client, not (like Keynes) with that between the capitalist employer and the worker in productive industry. His focus on fluctuations in lending standards over the cycle, and on the role of financial innovation in the promotion of instability, is significantly different from the central concerns of Keynes.
And I remain unconvinced by Marc’s argument for including institutionalism as a strand of post-Keynesianism. Some of the names in this part of Table 1.9 read very oddly: Thorstein Veblen, for example, and my former boss at the University of Lancaster, Philip Andrews, who to the best of my recollections never made a favourable reference to Davidson, Kalecki, Minsky or any of the other prominent post-Keynesians who feature in the Table. The case for including the Kaldorians as a distinct and separate strand is rather more persuasive. ‘This strand’, he notes, ‘is mostly concerned with the constraints arising from open economy considerations, such as the balance of payments constraints or the fundamental identity that links private financial saving, public deficit and the current account balance’ (p. 44).
A Broad Tent or a Narrow Tent?
All this leads directly to a consideration of Marc’s discussion of the arguments for treating post-Keynesianism as a broad tent or a narrow tent (pp. 46–49). Paul Davidson is a strong advocate of the narrow tent, which should include only fundamentalist Keynesians. ‘Davidson now wishes to redefine post-Keynesian economics, in the hope of stopping the marginalization of his ideas, by restricting its meaning to Fundamentalist Keynesianism (only the first strand of Tables 1.8 and 1.9), eliminating authors such as Eichner, Minsky, the Sraffians and all Kaleckians in the process’ (p. 46). This, he hopes, will avoid the construction of an incoherent theoretical Tower of Babel.
Marc, however, is a broad-tent supporter. ‘One of the objectives of this book’, he writes, ‘is to show that a synthesis of the various streams of post-Keynesian economics is possible’. Unlike Hamouda and Harcourt, he continues, ‘who believe that a search for a coherent vision is a futile endeavour, thus adopting a “horses for courses” attitude, this book presents the views of a sort of representative post-Keynesian, taking what I believe to be the strongest contributions of each strand’ (p. 47). He endorses the similar position taken many years ago by Alfred Eichner and Jan Kregel (Citation1975) and by Philip Arestis (Citation1996). But Marc does acknowledge that ‘a large number of post-Keynesians believe that the economics of Kalecki provide a preferable foundation for an alternative to orthodox theory, at least when dealing with problems tied to the concept of effective demand’ (p. 49). Geoff Harcourt was among them, along with Joan Robinson and Nicholas Kaldor, who both turned away in later life from Keynes and moved closer to Kalecki.
Marc recognises that ‘a large number of post-Keynesians believe that the economics of Kalecki provide a preferable foundation for an alternative to orthodox theory, at least when dealing with problems tied to the concept of effective demand’. Some critics would even argue that ‘post-Keynesian economics is a misnomer, because it encompasses several founding contributors besides Keynes’ (p. 49). But he concludes that his five strands of post-Keynesian theory all have something important to contribute.
My own opinion on these weighty questions is rather more mixed. First, I acknowledge that the intellectual relationship between post-Keynesians and several other heterodox schools of thought is really rather complex, with considerable areas of agreement coexisting with some important divergences. Thus I have some sympathy with the ‘narrow tent’ approach. Second, I maintain that this position confirms the case for pluralism in economics, with a number of different heterodox approaches being seen as independent but also as sympathetically related to each other. Finally, I believe that it also provides a strong argument for mutual cooperation between post-Keynesians (and other heterodox schools) with the other social sciences, which in many ways are closer to them than mainstream economics will ever be.
To take one important example: post-Keynesianism and Marxian political economy do have a lot in common. They both deal extensively with capitalist production and not (as is in effect the case with mainstream economics) with simple commodity production. Marx’s analysis in volumes II and III of Capital of what Keynes would later describe as a ‘monetary production economy’ comes quite close to articulating a theory of output driven by effective monetary demand. Marx concentrates on the decision-making procedures of capitalists rather than individual consumers or households, and business investment is fundamentally important for him, being not only the driving force but also the principal cause of the system’s instability. But Marx never did produce a coherent theory of finance, having died in 1883, decades before his disciples identified a new stage of ‘finance capital’, and was committed to a labour theory of value that few if any post-Keynesians could ever support. His analysis of the falling rate of profit is equally problematic.
As I have already noted, the relationship between Sraffian political economy and the post-Keynesians is no less complicated, with some fundamental points of disagreement and a number of issues on which they come closer together. Something very similar can be said about the relationship between post-Keynesianism and institutional economics. They share a deep hostility to the mechanical models used by neoclassical economics, with its grossly exaggerated emphasis on formal (especially general equilibrium) modelling, which comes at the expense of a genuine concern with capitalist reality. Post-Keynesians and institutionalists also tend to agree on some important policy issues, including the necessary role of the state and support for the post-1945 social democratic compromise. However, there are also significant sources of disagreement. Few if any post-Keynesians would reject formal modelling of any sort, as many institutionalists do, or completely deny the potential benefits of econometric research. As I noted some years ago, ‘[t]here are some important unresolved methodological tensions here’ (King Citation2015, p. 119).
Very similar issues arise in the relationship between post-Keynesians and other prominent heterodox schools of thought, including evolutionary economics (King Citation2015, pp. 119–120), feminist and ecological economists (King Citation2015, pp. 120–122), and behavioural and complexity economics (King Citation2015, pp. 122–125). But there is little or no literature that I am aware of on the relations between these three schools of heterodox economics and the Post Keynesians. It would be good if these important omissions were to be rectified before too long.
My overall conclusion, then, is rather different from Marc’s. I consider that a ‘narrow tent’ version of post-Keynesianism is desirable, in order to protect the crucial theoretical and methodological differences that divide post-Keynesians from many (or most) other heterodox tendencies. But I do believe that this should be combined with a commitment to pluralism, as advocated shortly before his death by Kurt Rothschild (Citation2006) on the grounds that the real economic and social world that we live in is too complex to be understood by means of a single analytical apparatus, and also so changeable that it must necessarily be socially and historically specific to a greater or lesser degree. Additional grounds for advocating pluralism in economics can be summed up in what I once termed the ‘three e’s’: evolutionary, ethical and esthetic (King Citation2015, pp. 39–40).
This leads me to an important final point, which is not made in Marc’s otherwise excellent introductory chapter: the need for strengthened cooperation between post-Keynesians (and heterodox economists more generally) and the other social sciences. There is, I think, ‘no single, intolerant, monolithic mainstream in anthropology, economic geography, psychology, political science or sociology’ (King Citation2015, pp. 129–130). Economics does seem to be the only social science with such a homogeneous mainstream, with only a very small minority of dissidents at all inclined to any cooperation with the heterodox. Some post-Keynesians have already concluded from this that a migration strategy should be pursued, and have ‘found a home in departments of public policy, international political economy, politics and sociology, and some even (taking a very deep breath) in business schools’ (King Citation2015, p. 130). A slightly different strategy has been proposed by Tim Thornton (Citation2013), who draws on the experience of the department of political economy at Sydney University to advocate what he terms the ‘social science wing’ of economics to constitute itself as a separate, independent discipline within tertiary social science faculties. Much more discussion is needed on these fundamental questions.
Conclusion
Sadly the word limit means that I can say nothing about section 1.1, where Marc establishes the need for an alternative to mainstream economics (pp. 1–4), or on his analysis in the later parts of section 1.3 on scarcity versus abundance (pp. 24–26), on unfettered versus regulated markets (pp. 26–27), on ideology (pp. 28–29), on the role of formalism in economics (pp. 29–31) or on his ‘additional reflections on presuppositions’ (pp. 31–32). Also missing is any discussion of the early part of section 1.4, where Marc provides a very short history of post-Keynesian economics (pp. 33–35), sets out its presuppositions (pp. 35–39) and outlines his views on the role of econometrics (pp. 39–40).
I have also made no reference to any part of section 1.5, which deals at some length with the limits of orthodox economics. Thus I have been silent on Marc’s analysis of the Cambridge capital controversies (pp. 50–52), the ‘stability nightmare’ of neoclassical economics (pp. 53–55), the profound weaknesses of neoclassical production theory (pp. 56–60) and of neoclassical empiricism (pp. 60–67), and on his concluding remarks on the further limits of orthodox economics (pp. 67–73). I do, however, concur with Marc’s conclusion to the chapter, which comes at the end of section 1.5. ‘Heterodox and post-Keynesian economics’, he argues convincingly, ‘can thus develop their own research programmes and their theories without mental reservations. Their theories are just as scientific as those of the orthodoxy. Indeed, heterodox theories could even be said to be more scientific since they are founded on realistic hypotheses’ (p. 74). This is a persuasive introduction to the remainder of this very stimulating book.
Acknowledgements
Í would like to use this opportunity to acknowledge and thank the reviewers who reviewed this article and aided in its publication.
Disclosure Statement
No potential conflict of interest was reported by the author(s).
References
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